Ecommerce Sales Tax in the USA
While the best thing about selling online is that it allows businesses to expand their customer base, all those far flung sales can also lead to significant tax complexity. Online businesses don’t have to charge sales tax in states they’re not physically operating in until they’re considered to have achieved what’s known as ‘economic nexus’ in those states.
How does an ecommerce company achieve economic nexus?
They have to meet certain tax thresholds such as the number of sales or amount of total sales which vary from state to state.
Once a business has met those thresholds, it then has to calculate its ecommerce sales tax. But calculating sales tax for ecommerce companies can be complicated. Not only does each state have different sales tax rates but many have items that are exempt from sales taxes or taxed at a lower rate. So, how do you know you’re calculating the right online sales tax amount for each customer so you can ensure your sales tax compliance?
We’ll walk you through how to determine when you need to charge and calculate ecommerce sales tax, how to calculate it, and we even have a sales tax calculator to help you understand how online sales taxes work!
Do I need to collect sales tax for selling online?
Whether or not you need to collect online sales tax depends on whether your business has reached nexus – or connection – in the states your customers are buying from.
If your business has a physical presence such as a store, office, or warehouse in a state, you’re typically required to collect sales tax for transactions within that state if that state has a sales tax. With the popularity of online stores, the definition of a sales tax nexus evolved beyond physical presence. Your store might not physically be in a state but you might have what’s known as ‘economic nexus’ there, depending on your sales revenue or transaction volume.
What qualifies you for economic nexus in each state varies. As an example, in North Dakota, you’ll reach economic nexus once you’ve sold $100,000 worth of goods to customers in that state. In Texas, however, you won’t reach economic nexus until you’ve sold $500,000 worth of goods to customers in that state. Kentucky calculates economic nexus slightly differently and requires businesses that have $100,000 in sales or 200 transactions in that state to collect sales tax.
That means that you have to keep track of your sales and transaction volume in every state to ensure your sales tax compliance. You can look up the requirements for each state here.
How to calculate sales tax
Whether you’re selling mugs with photos of your customers’ pets on them or replacement parts for microwaves, the steps for calculating sales tax are the same.
Here’s how to calculate ecommerce sales tax accurately and ensure sales tax compliance for your business:
As discussed above, understanding where your business has economic nexus that requires you to collect sales tax is the first step to calculating ecommerce sales tax. Once you know everywhere you need to collect sales tax, you can ensure that you’re properly charging sales tax to your customers.
Register for Sales Tax Permits
Once you determine where your business has nexus, you’ll need to register for sales tax permits with the respective states’ tax authorities. This typically involves submitting an application and obtaining a permit or license to collect sales tax within that state.
Categorize Your Inventory
Categorizing your inventory is required to properly calculate ecommerce sales tax. Some states make certain items tax-exempt or charge a lower sales tax rate on others. For example, diapers are tax-exempt in New York State whereas agricultural seeds are tax-exempt in Alabama. In Virginia, you’ll only need to charge 1% on things like personal hygiene products and groceries but you’ll have to charge the full sales tax rate of 5.3% on everything else.
If you only sell one type of item, categorizing your inventory will be easy. However, if you sell items across many product categories this step could become complicated – especially if you need to charge sales tax in many jurisdictions with different sales tax exemptions.
Calculate Sales Tax
Each state has its own sales tax rates, which might vary further based on local jurisdictions since some cities charge additional sales taxes. Integrate an ecommerce sales tax calculator tool or an ecommerce sales tax software that can accurately calculate the applicable tax rates for each transaction based on the customer’s location during checkout.
Many ecommerce platforms offer integrations with tax calculation services to streamline this process. For example, on Shopify, you can use TaxCloud’s Simple Sales Tax app to integrate TaxCloud directly into your online store. The right tech can make figuring out how to calculate sales tax for ecommerce stores so much easier.
Collect Tax Exemption Certificates
For those exempt from sales tax such as resellers or tax exempt organizations, consider offering them a way to purchase from you tax-exempt by collecting and maintaining valid exemption certificates to support tax exempt transactions.
Remit Collected Taxes
You’ll then have to remit your collected taxes and file your sales tax return with every state you collect sales tax in on a monthly, quarterly, or annual basis depending on the state and your company’s filing obligations. Be sure to pay attention to deadlines and reporting requirements for each state. Not sure where to find this information? Don’t worry – TaxCloud does a monthly blog series that lists the filing dates in each state so you don’t miss one.
Keep Detailed Records
Be sure to maintain accurate records of sales transactions, tax collected, exemptions, and any other relevant documentation. Record-keeping is crucial for audits or in case of any discrepancies.
Given the complexities and variations in sales tax laws across different states, using an automated sales tax calculation software like TaxCloud can streamline the process and ensure sales tax compliance with all relevant regulations.
TaxCloud’s Ecommerce Sales Tax Calculator
Understanding the ins and outs of sales tax can be overwhelming. To help you get started on what we’ve outlined so far, we encourage you to check out our interactive ecommerce sales tax calculator. While you can’t use it to charge tax in your online store, it’s great for those new to calculating online sales tax or for those who just want to learn more about how complex sales tax is.
Use it to look up your sales tax obligations in states where you have economic nexus or are about to reach it. Or use it to learn more about the sales tax thresholds of different states via our interactive map. We also share sales tax guides for every state! It has the answers to anything and everything you want to know about ecommerce sales tax.
What happens when a business doesn’t pay sales tax?
When your business fails to pay the required sales tax or pays the wrong amount because you calculated sales tax inaccurately, it can lead to a number of consequences that you very much don’t want. These consequences depend on the severity of your non-compliance. For example, if you failed to pay $100 in sales tax you’re not going to face the same consequences as if you failed to pay $1 million in sales tax. What happens will also depend on the jurisdiction’s tax laws.
Here are some potential repercussions:
Sales tax penalties and Interest
Initially, your business may face penalties and interest fees for late or unpaid taxes. These penalties can accumulate over time and can be subject to interest, significantly increasing the amount owed.
Sales tax fines and Liens
Tax authorities can impose fines or issue liens against your business’ assets. Liens can affect the business’s ability to obtain credit or loans or affect your ability to land large customers who might do a credit check before signing a contract with you. It could even lead to the seizure of your business’ assets to satisfy the tax debt.
Legal Action and Audits
If you continue not to pay or evade your sales tax obligations that could lead to legal action. Tax authorities could initiate audits to investigate financial records and practices. Audits aren’t just time-consuming, they can also be costly and lead to additional penalties if discrepancies or deliberate non-compliance are found.
Revocation of Your Business License
In extreme cases, continued non-payment or flagrant disregard for tax obligations can lead to your business license being revoked.
If you run a small business or sole proprietorship that’s not incorporated, the business owner might be held personally liable for unpaid sales taxes. This can put your personal assets at risk.
Deliberate or severe cases of tax evasion can lead to criminal charges against the business or its owners, potentially resulting in fines, imprisonment, or both.
While that paints a pretty alarming picture, the good news is that not everyone who pays their ecommerce sales tax late or calculates their ecommerce sales tax incorrectly ends up in prison or has their business license revoked.
Still, no business wants to face sales tax compliance issues since they can quickly add up with fines, interest, and penalties. Businesses must prioritize tax compliance, keep accurate financial records, and address any tax issues promptly to avoid facing these repercussions.
Ensuring sales tax compliance with TaxCloud
Simplifying the process of calculating sales tax for ecommerce stores is what we do at TaxCloud. TaxCloud’s sales tax software is essential to ensure sales tax compliance and reduce the risk of errors when calculating and remitting sales tax.
Not only does TaxCloud integrate with your existing ecommerce platform (like Shopify, BigCommerce, WooCommerce, and more!) to calculate taxes for you but it keeps tabs on which states you’ve achieved economic nexus in – and which you’re about to.
Here’s how TaxCloud helps:
- Accurate Tax Collection: TaxCloud’s real-time sales tax calculator calculates sales taxes across over 13,000+ US jurisdictions to ensure your sales tax calculations are accurate, significantly minimizing the potential for errors in charging the correct tax amounts.
- Proactive Threshold Alerts: With TaxCloud, there’s no need to learn the complex economic nexus rules for each state yourself. TaxCloud’s software monitors thresholds and notifies you when you reach a point where registration and tax collection in a new jurisdiction are necessary.
- Notifications on Tax Responsibilities: Stay updated on your tax obligations, eliminating the risk of missing crucial filing deadlines. TaxCloud gives you notifications of when and where you need to file taxes – or we can even handle tax filing and remitting for you.
- Effortless Tax Reporting: TaxCloud’s software generates comprehensive, ready-to-use sales tax liability reports for each jurisdiction. And it also recalibrates your sales taxes when returns are processed.
- Audit Support and Documentation: In the event of an audit, TaxCloud will help you! With the documentation you need and support from our team, you’ll have everything you need to navigate the process effectively.
Streamline your sales tax reporting and filing today with TaxCloud.