Starting your online shop, designing your website, and selecting the right products to sell bring excitement to eCommerce business owners. However, few entrepreneurs care as much about the other important aspect of selling online: compliance with sales and use taxes.
After all, taxes just seem so…complicated. There are so many regulations that must be understood, so many tax rates that can confuse even the most shrewd mathematicians, as well as enough year-to–year and month-to–month changes that it’s difficult to keep up with it all.
For smaller eCommerce shops with fewer resources and staff, it can be difficult to get the online sales tax correct.
Wix wants eCommerce merchants to succeed. This is why we created the Online Sales Tax Guide for eCommerce. It was created to give you a comprehensive understanding of eCommerce sales taxes. One word of caution though:
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Tax regulations can vary from one jurisdiction to the next and are subject to change frequently. Always consult a certified tax accountant for specific advice that will suit your online store’s needs.
What is an online sales tax?
The online sales tax is a small portion of a sale price. All sales taxes must be collected and paid by retailers. All 45 states in the United States have sales tax. Washington, D.C. has no sales tax. Alaska, Delaware and Montana, New Hampshire, Oregon, do not have sales tax. The majority of state sales taxes are between 4% and 7% with an average rate of 5.09%.
Sales tax is responsible for nearly 34 per cent of all revenue. States and other jurisdictions use the eCommerce sales tax revenue for road, bridge, fire, school, and public transportation. The state’s dependence on sales tax for infrastructure improvements won’t change.
Online store owners must be aware of the importance of sales tax.
Noncompliance can lead to financial penalties and fines if you don’t collect and pay the correct amount of sales taxes. These fines are most damaging to small businesses. These fines can also trigger an unpleasant and costly audit.
Whether you are just starting your online store, or expanding your existing store’s sales online to new markets and channels, it is important to understand your eCommerce sales tax obligations.
The online sales tax is different from one state to the next (with examples).
Every state has its own online sales tax. The sales tax rate varies between states. Some states, like Michigan and Connecticut, only charge sales tax at the state level. Connecticut has a 6.35% statewide sales tax. It is flat 6.0% in Michigan.
Some states permit local jurisdictions to collect sales tax in addition the statewide sales taxes. Nevada has a 4.6% state sales tax, but the total rate in Nevada may be as high at 8.265%. Utah also charges a 4.65% sales tax. Local jurisdictions may impose additional sales taxes of between 1.3% to 3.4%.
Five states, including Louisiana, Alaska, Arizona and Colorado, are considered “home rule” states. This means that cities, counties, and local governments may enact or administer their own sales/use taxes. Some states also allow the creation of special taxing districts. This means that the sales and use taxes rates may vary from one county to another, or even from town to town.
Although eCommerce sales tax calculations can vary from one state to the next, collection schedules also vary. Some jurisdictions require annual payments and go by the calendar year, while others require that eCommerce merchants file sales and use taxes semi-annually, quarterly, or even monthly.
Do not let the mazes of regulations and filing requirements get in your way. Wix has a guide that will help you navigate the “Tricky 10”, states with the most complicated tax filing requirements. This blog by our friends at Avalara(r), walks you through the details regarding online sales tax rules on an state-by_state basis.
What is the best time to add sales tax online?
Online sales tax must be collected whenever an individual purchases an item that they can touch. This broad rule applies to most SKUs that an eCommerce company sells to customers, including books, electronics, furniture, and cosmetics. However there are exceptions. These exceptions are determined state-by-state.
In some states, clothing and groceries are exempt from tax. Sometimes, these exceptions trickle down to product level. Raw foods, for example, may be exempted from tax, while prepared foods could be taxable. Items that are resold might be exempt from tax because the reseller is responsible for paying the eCommerce sales taxes.
The time of the year could also influence when sales tax will be collected. Some states offer sales tax holidays for certain items at specific times throughout the year. Florida, for example, offers a Disaster Preparedness Sales Tax Holiday that lasts for a period of 10 days at the beginning of hurricane season. A back-to school sales tax holiday is also offered each summer, for a period of 10 days before the start of a school-year.
Additionally, some states exempt not-for profit organizations and government agencies from the payment of sales tax on purchases they make.
While type of item and buyer play a part in determining whether you should charge sales tax online, the most important item online retailers need to consider is nexus.
These are the 6 most popular types of online sales tax nexus
On June 1, 2018, the definition of nexus was changed for good. This was the day that the Supreme Court of the United States ruled for the state in the landmark South Dakota vs. Wayfair, Inc. This ruling allowed states to require online sellers that they collect and remit sales taxes based on nexus.
What is a nexus? This means that the online retailer has a “significant relationship” with the state. Online retailers are required to collect and remit sales taxes based on the activity of their business within the jurisdiction once nexus has been established.
These are the six most popular types of online sales nexus:
01. Economic Nexus
02. Physical presence nexus
03. Marketplace facilitator nexus
04. Click through nexus
05. Affiliate nexus
06. Non-collecting seller tax nexus
01. Economic nexus
All 46 states that levy sales taxes in the U.S. currently have to meet economic nexus criteria. This means that online sellers will need to collect and remit the eCommerce sales tax depending on their state.
Some states may require online sellers to make more than $100,000 in sales in order to reach economic nexus. Others may require that at least 200 transactions be delivered to addresses within the state in order for an online seller to reach economic nexus. Some states include resales and exempt items in their threshold requirements. Others do not.
All 46 states that have economic nexus laws allow companies to avoid paying sales tax if they fall below the thresholds.
02. Physical presence nexus
This seems like the easiest type to understand. You must pay sales tax to any state where you have a physical presence. However, the term “physical presence” can be defined in a wide range of ways. This means that online sellers must collect and submit eCommerce sales tax in all states where they have a shop, office, warehouse or employee.
If companies sell products at trade shows, some states require them to file an online sales tax. Another thing to note: Using dropshipping could cause a physical presence nexus in a state if the ship-to address is . This reference guide provides more information on the relationship between Dropshipping and Physical Presence .
46 states currently have requirements for physical presence nexus.
03. Marketplace facilitator nexus
What happens to online sales tax if your products are sold on an eCommerce platform like Amazon, eBay, or Etsy?
46 states have a marketplace facilitator nexus. This means that the marketplace where you sell may be responsible to collect and remit sales tax. This doesn’t mean that you are exempt from responsibility. Each state has its own requirements regarding what is and is not allowed in the marketplace facilitator nexus.
Items that are available in California might not be available in Idaho. Online store owners who sell on third-party marketplaces need to know the exact location where their inventory is shipped. This could lead to a physical presence in a state.
04. Click-through Nexus
Let’s suppose your online store is in South Carolina. You may also sell your products on other websites that are based in other states. This activity may trigger click-through nexus. It means that you could be required to pay sales tax online in other states. This type of nexus is also known as the “Amazon law” and was first created in New York.
Today, click-through thresholds are in effect for 18 states. Most thresholds are low so it is important to be familiar with them.
05. Affiliate nexus
Let’s suppose you have an online shop based in Oregon. You have connections with people in two states that don’t pay sales tax. Affiliates from other states promote your products and you share a portion of your earnings with them. This type of relationship could trigger affiliate nexus.
33 states currently have affiliate nexus requirements.
Get a breakdown of states by state here .
06. Non-collecting seller use tax nexus
Let’s suppose your online store is located in Minnesota. Although you sell products to South Dakota customers, South Dakota doesn’t require that sales tax be collected. You may still be required to report consumer purchases to South Dakota tax authorities and notify customers if you are subject to a non-collecting seller tax nexus. These requirements are currently in effect for 10 states and Puerto Rico. Find out more.
How to comply eCommerce sales tax regulations
What do you do when you reach the threshold for economic nexus (or any other type) of nexus in a state? Online sales tax is a world where the online shop must register for sales and use taxes, verify exemption sales, file returns, and provide a valid exemption certificate or resale certificate.
The first step is to register for a sales tax permit. This may be called a sellers’ permit or a sales tax license in some states. One can be found on the website for the taxing authority in which you have established nexus. This blog post provides a state-by–state guide for obtaining eCommerce sales tax permits.
It is encouraging to note that 25 states are now participating in the Streamlined sales Tax (SST) program. This means that participating states have made it easier for merchants to comply with eCommerce sales tax by:
- A standard set of tax rules, definitions and guidelines should be followed
- Tax collection management
- Offering online registration
- You can also supplement the cost by outsourced tax partners (called Certified Service Providers or CSPs), who can help you navigate through the complexities of online sales taxes.
This blog article outlines six key points to eCommerce sales tax compliance.