Understanding sales tax collection and remittance is crucial for businesses, given the requirements set by the US government. If you’re in the ecommerce business space, you might find it particularly challenging due to the unique rules and steps involved compared to traditional stores. However, with this guide at your side, navigating the complexities of sales tax for your ecommerce operation becomes more precise and manageable. We’re here to clarify, making your sales tax responsibilities and the process of remitting taxes easier to handle.
What is a Sales Tax for Sellers?
To a seller, sales tax represents that extra amount collected from customers when selling tangible personal property. Notably, this category primarily encompasses consumer goods that exist in a physical form. Besides tax collection, the business is also responsible for sales tax remittance. Companies that do not have sales tax nexus or sell non-taxable goods and services do not need to collect and remit sales tax.Do I need to Collect Sales Tax for Selling Online?
The short answer is yes; you must collect sales tax if you sell online and meet the below requirements. The two primary conditions qualifying an online business for tax collection are:- There is a nexus or a connection between the seller and the state where the company operates (physical or economic) AND
- If the business’s goods or services are taxable under the state’s sales tax laws.
Origin-Based vs. Destination-Based Sales Tax
Sellers usually need clarification on origin-based and destination-based sales tax. Both these terms define two different methods of in-state tax collection. Let’s have a look at both.Origin-Based Sales Tax
You must charge sales tax based on your business’s location if you are in an origin-based state. For example, if you are located in Arizona, an origin-based state, you need to charge Arizona’s sales tax rate irrespective of the location of your customers. Building on this, let’s use Phoenix, AZ combined sales tax rate of 8.6% (including state, county, and city sales taxes). Whenever you sell to any customer, be it someone residing in Phoenix or a customer ordering from Tucson (where the combined sales tax rate is 8.7%), you consistently apply the 8.6% sales tax rate to all transactions. This is because, in origin-based states like Arizona, the tax rate is anchored to the seller’s location, making the calculation straightforward and uniform, regardless of where your customers are situated. Twelve states impose an origin-based sales tax:- Arizona
- California
- Illinois
- Mississippi
- Missouri
- New Mexico
- Ohio
- Pennsylvania
- Tennessee
- Texas
- Utah
- Virginia
Destination-Based Sales Tax
In these states, the sales tax hinges directly on your customer’s location. As a seller, you’ll calculate different sales tax rates for each transaction, depending on where your customer lives or where the product is shipped. Besides the 12 origin-based states, all other states charge destination-based sales tax (excluding those with zero sales tax). If you are a remote seller, there might be different sales tax laws from in-state sellers for origin-based states. You can visit your state’s Department of Revenue website to understand tax collection as a remote seller or book a Call with us, and we’ll guide you through the process.How to Collect Sales Tax?
Sales tax collection and remittance are two different but equally important steps. According to the state’s laws, sales tax collection refers to obtaining sales tax from customers as a percentage of their taxable item or service.Understand your State Laws
The prerequisite to sales tax collection is understanding the laws of all states you do business in or sell to. Did you know that approximately 45 states enforce a state sales tax, with 38 of them levying an additional local sales tax? If you are an ecommerce seller, you may have sales tax nexus in multiple states. Ensure you understand all those states’ sales tax laws to design your strategy accordingly.Determine the Correct Sales Tax Amount
To collect the due sales tax on your transactions accurately, you must be well-versed with the sales tax rates in the states where you have established a tax nexus. Consider specific considerations such as sales and transaction thresholds, non-taxable items, and fluctuating local tax rates. Simplify this process by leveraging sales tax calculators like the one provided by Shopify, which ensures precise calculations for each transaction, guaranteeing compliance and minimizing errors.Register for a Sales Tax Permit
Before you begin collecting sales tax, it’s mandatory to register for a sales tax permit in the states where you have a tax nexus. Remember, collecting sales tax without a valid permit is against the law.Collect Tax on All Sales Channels
Do you sell on multiple sales channels (e.g., brick-and-mortar store, drop-ship, etc.)? Ensure that you collect sales tax on all of them. For instance, if you have an online store and a physical outlet, you must collect sales tax on transactions through both channels and report the sales tax return with sales from both.Do I Need to Collect Sales Tax on Shipping and Handling Charges?
The application of sales tax on shipping and handling fees can vary. Here’s a general guideline:- Taxable Items Delivery: The shipping charges are usually taxable when linked to the delivery of taxable goods.
- Separately Stated & Optional Charges: If shipping and handling fees are optional and listed individually on the invoice, they are typically exempt from sales tax, even if the shipped item is taxable.
- Non-Taxable Items Delivery: Shipping charges associated with non-taxable items are generally not subject to sales tax.
Remitting Sales Taxes
Sales tax revenue is used by state and local governments to fund various public services, such as schools, roads, and public safety. Failing to remit the correct sales tax amount can result in penalties, fines, and even legal troubles for your business. Ensuring accurate and timely sales tax remittance is essential to maintain compliance and avoid costly consequences. Here’s how it is done:- Know Your State’s Rules: Each state has rules for reporting sales tax. Some want just a summary, while others need a more detailed report.
- Collect Sales Tax: Set up your e-commerce platform to automatically calculate and collect the correct sales tax from your customers based on their location. Make sure your tax settings are up-to-date and accurate.
- Keep Detailed Reports: Make a clear and complete report of the sales tax you’ve collected, following your state’s guidelines.
- Submit Your Sales Tax Returns: Adhering to the specific filing and sales tax remittance deadlines set by your state, which may be monthly, quarterly, or annually, is paramount in sales tax compliance. Alongside submitting your returns, ensure the timely payment of collected taxes.