Sales tax and Ecommerce go hand in hand. Whether you like it or not, you must pay sales tax as a customer. As a seller, you must collect and remit it unless you live in a state with no sales tax. In a 2020 Statista report, 35% of tax revenue collected by the US government was from sales tax.
Whether you are collecting sales tax using Shopify or another ecommerce platform, sellers always look for ways to simplify tax collection and management. Understanding the basics of sales tax to comply with relevant legal formalities and requirements is essential.
Here is the complete sales tax guide for ecommerce sellers with a step-by-step breakdown for Shopify stores and other online businesses. Let’s begin with the definition of sales tax.
What is Sales Tax?
Sales tax is a consumption tax charged as a percentage of the taxable goods purchased during the point of sale. The sales tax goes to the state government for developmental projects. In ecommerce sales, sales tax collection and remittance are the responsibility of the online retailer to the state. The seller is responsible for charging customers the right amount of tax, collecting it, filing, and remitting it to the state. You are responsible for sales tax collections and remittances in the following conditions.- The product you sell or the service you offer is taxable.
- Your business has a physical or economic sales tax nexus in the state.
What is Nexus?
Many sellers are curious about the term nexus and what it means. It represents a connection between a seller and the state where their business resides. Regarding business, a sales tax nexus can be of two types.- Physical Nexus: A physical nexus refers to the physical presence of a business in a state. It can be an office, store, warehouse, inventory, employees, etc.
- Economic Nexus: This was based on South Dakota v. Wayfair 2018 US Supreme Court decision. The decision resulted in the state’s ability to collect sales taxes from ecommerce and other remote transactions. The ruling eliminates the requirement that a seller must have a physical presence in the taxing state to collect and remit sales taxes to that state. An economic nexus is formed when an online business meets a specific sales threshold or crosses a particular number of transactions. These transaction limits and sales thresholds keep changing, and economic nexus laws vary among states. Some do not set a transaction limit, while others do, along with a sales threshold.
How to Collect Sales Tax? 5 Steps to Sales Tax Compliance.
The following are the steps you need to undertake as an ecommerce retailer to comply with sales tax laws in your state.1. Check Taxability and Sales Tax Requirements for each State
Every state tax the products you sell or services you offer differently. For instance, if you deal with groceries or prescription drugs, you may be exempt from sales tax in many states. On the other hand, most tangible personal property is subject to sales tax. Also, some products under a specific price limit are exempt from sales tax in some states. Some other items that may not be taxable in each state include clothing, supplements, and digital items, such as Software-as-a-Service (SaaS) products. You must check taxability by each state since every state has different sales tax rules for product taxability. As an online seller or a service provider, you must also determine if your business meets the requirement for nexus within each state. You must collect and file sales tax when you identify that you meet these requirements. While this can be complex, sales tax solutions and services like those offered by TaxHero exist. You can contact their Sales Tax experts team, who will simplify the process for you.2. Register for a Seller’s Permit
It is necessary to register yourself as a seller in your nexus state. You need a sales tax permit, also known as a seller’s permit, before collecting and remitting sales tax as an ecommerce seller. Some states may allow you to collect tax without a permit, but most don’t. You must know how to get a seller’s permit before applying. Visit the website of the Department of Revenue for each state to understand the application process. You can refer to our guide to learn everything you need to know about a seller’s permit.3. Collect Sales Tax
Now, you are all set to collect the sales tax from your customers. As you may already know, every state has a different sales tax rate. Not only are 45 states collecting state sales tax, but 38 states also collect local sales tax. Therefore, it is essential to check the local tax rate too. As the names indicate, state sales taxes are imposed by the state, while local municipalities impose a local sales tax. In the US, state sales tax rates range between 2.9% – 7%, whereas local tax rates vary between 0.30% – 8.3%. Some states require ecommerce sellers to collect sales tax on origin-based sourcing, while others prefer destination-based sourcing. Online sellers must correctly set up their sales tax collection on their Shopify store or other ecommerce platforms like BigCommerce and WooCommerce.4. Report and File Sales Tax
Knowing how to collect sales tax is one part of the step, and reporting and filing it is the other. While all states allow online sales tax filing, it is more complex than just adding up the total transactions in each state. States need to know how much sales tax you’ve collected in their revenue jurisdictions by city, county, and special tax districts. If you sell on multiple sales channels, you must combine your sales tax into one report for each state to submit the returns accurately. What if you did not collect sales tax during the taxable period? You still need to file zero sales tax returns. Breaking down your tax transactions may get complicated, especially with large sales volumes. You can use a full-stack sales tax solution, like TaxHero, to make it simple. You must also ensure you file the sales tax returns timely and by the due date. Each state will have a specific due date and assign a tax filing frequency when you get your seller’s permit. Your frequency of tax remittance also varies state by state, which may be monthly, quarterly, semi-annually, or annually. You must remember to file your sales tax returns a day or two before the due date.5. Avoid Penalties
The sales tax compliance process continues even after the collection and remittance of sales tax to the state. You must consistently improve your tax filing record to avoid penalties for unsatisfactory sales tax collections and remittances.
Knowing and remembering your sales tax due dates is essential to avoid penalties, as it can result in the revocation of your sales tax license. As mentioned, due dates and tax filing frequencies differ by state. If you conduct business in multiple states, keep track of all the due dates and filing frequencies separately.