What Online Sellers Need to Know About Sales Tax
As an online seller, you’ve probably already bumped up against sales tax. If you’re just getting started, sales tax may be one of the administrative hassles you’re least looking forward to. After all, we’re pretty sure the only people who start a business looking forward to all the accounting are… accountants. Whether you’re new to selling online or an old hand, this post will look at common sales tax questions: What is sales tax? Who do you collect it from and how much? Read on to find out.
Sales Tax 101
Sales tax, quite simply, is a percent of the total amount charged on retail sales that states and localities require merchants to collect. The funds collected are then used to pay for things like roads and schools in a state’s budget.
For example, you own a boutique and sell a bottle of suntan lotion for $10 in Virginia Beach, VA. You’ll actually charge your customer $10.60, due to the 6% sales tax in the 23452 zip code.
As an online seller, you are required to collect sales tax in states where you have “sales tax nexus.” Sales tax nexus is just a fancy way of saying “a significant presence.” All states vary when it comes to how they define nexus, but it generally means that a merchant has a physical presence in a state, like an office, store, warehouse, or employee.
For example, if you live Texas, have a warehouse in Oklahoma and you hired your cousin, Betty Lou, in Arizona to help you with customer service, you might have nexus in all three states.
Collecting Sales Tax
So now that you’ve established where you have nexus, the next thing that you will need to do is apply for a sales tax permit. You can receive them from your state’s taxing authority and they can usually be found by searching for “[Your State’s] Department of Revenue.” After you receive your sales tax permit, you will also be given a schedule of when you will need to send the sales tax you collected to the state.
Remember that the amount of sales tax that you will need to charge is based on a percentage of a transaction amount. Some states will require sellers to charge sales tax based only on the price of the items that they sell, while others require you charge sales tax on shipping costs as well.
Further, not all states are created equal when it comes to what sales tax rate to charge. The states that have a sales tax set a state sales tax rate, but localities can also tack on an extra percentage of sales tax. Going back to that Virginia Beach example, the Virginia state sales tax rate is 4.3%, but there’s also a 1% Virginia Beach sales tax and a .7% district sales tax, bringing that total to 6%. (You can look up sales tax rates anywhere in the U.S. with TaxJar’s Sales Tax Calculator.)
In order to complicate things further, some states have an origin-based sales tax while other states have a destination-based sales tax. Thankfully, origin-based sales tax states are fairly simple. Sellers are required to collect sales tax based on the location from where their items are shipped. Destination-based sales tax states are more difficult. Sellers are required to collect based on where their products end up; the buyer’s destination. For example, if you have nexus in Kansas, which is a destination-based sales tax state, you will have to figure out the sales tax rates for each of your buyers’ localities.
Handling All That Sales Tax You Collected
As an online seller, if you sell from multiple platforms or if you have nexus in several different states, you might find that compliance can be difficult. Things to consider include paying the correct amount by the correct due date and even breaking down your tax filing by jurisdiction. If you have nexus in a destination-based state, you will have to figure out which jurisdiction each buyer falls into!
Fortunately there are solutions out there that make sales tax simpler. At TaxJar we hope that one day small business owners scratching their heads over sales tax will be a thing of the past!
If you have more questions about sales tax, check out our Online Seller’s Guide to Sales Tax or join our group of sellers and accounting experts in the Sales Tax for eCommerce Sellers community.
Mark Faggiano is the founder and CEO of TaxJar, a service built to make post-transaction sales tax compliance easier for Etsy, Amazon, Shopify and other multi-channel ecommerce sellers. Mark’s passion is solving complex problems for small businesses. Sign up for a 30-day free trial of TaxJar and put a lid on sales tax!
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