- Author By Miva |
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Collecting sales tax is not usually why people decide to open their own online store. In fact, managing sales tax can be overwhelming for many store owners. And, with recent legislation changes, it’s not always easy to know where you owe, when you owe, what you owe, or how to ensure you’re compliant.
In this article, we’ll demystify the basics of eCommerce sales tax collection, reporting, and management.
What is Sales Tax?
State sales tax is never meant to be something you pay out of pocket, and instead is collected from your customers and paid directly to the state. You are, in fact, the middle man, collecting tax based on the goods or services you sell. But before we discuss collection, let’s back up a minute.
In order to collect sales tax, you should take a look at your business and decide if and where you actually owe. Whether you have received a letter from a state, heard from another seller, or read an article like this, you’ll need to learn where you have nexus before moving forward.
If you’re unfamiliar, “nexus” is a fancy word for having a significant presence in a state. This presence could be physical, economic, or even digital (as is the case with “cookie nexus”). The first two are the most common instances and most sellers will find they have either economic or physical nexus that requires them to collect sales tax.
Where Do I Owe?
Physical nexus is achieved in the state where you physically conduct your business. This would include the state where your company is located, where your employees live, where your inventory is stored (like a warehouse), or where you have an office space, to give a few examples.
Economic nexus is defined by the state, thanks to the landmark South Dakota vs. Wayfair Supreme Court ruling. This case gave the authority to the states to set their own definition as to what constitutes significant activity in their state.
Economic nexus typically consists of some combination of total transactions or sales into that state. While some states are moving to remove the transaction qualifier, others have thresholds that range from $100,000 (South Dakota) to $500,000 (Tennessee). Each state is different, so it’s important to stay up to date with current economic nexus laws.
Because you may have nexus in one state but not another, a free sales and transactions checker, like this one from Miva partner TaxJar, can help you understand where and when you cross each threshold so you’ll know what you owe. Keep in mind that nexus is determined over a matter of time, such as previous calendar year or 12 months’ worth of sales.
How Do You Remit Sales Tax?
Once you’ve determined where you have nexus, you’ll need to register for a permit. While this may seem like a headache, it’s actually illegal to collect sales tax on a transaction without possessing the permit, so don’t skip this important step.
With your permit in hand, make sure your shopping carts and marketplaces are enabled for collecting sales tax.
If you’re selling on multiple channels, you’ll want to make sure you’re also considering marketplace facilitator laws in addition to your nexus status. These laws allow marketplaces such as Amazon and Etsy to collect sales tax on your behalf. You are still liable for your own personal sites or other platforms that don’t collect for you. Not all states with economic nexus laws have marketplace facilitator laws, so once again it’s important to keep up with the changing legislation.
You know where you have nexus, you’ve registered for sales tax permits, you’ve configured your shopping carts correctly, so you’re now ready to start collecting!
You may be required to remit sales tax monthly, quarterly, or annually, depending on the state. Finding a sales tax software to automate those filings will be crucial to staying compliant.
But what if you didn’t have any sales for a month or more? You’ll still need to file what’s called a zero return. This lets the state know you intend to stay in business and aren’t hanging up your hat. Each state has their own zero return requirements (are you picking up on a theme yet?) so make sure you follow each state’s laws to remain compliant.
In addition to zero reports, there are other factors to be aware of around sales tax, including changing rates, products that are and aren’t taxable, and sales tax holidays. Like all sales tax laws, these vary from state to state, and the latter can be a personal choice as to whether or not your store acknowledges the tax-free dates.