- The U.S. Supreme Court case South Dakota v. Wayfair established that e-commerce retailers could be required to collect and remit sales tax.
- Each state has its own rules to determine which businesses are required to collect sales tax. Generally, you don’t have to collect sales tax if you make minimal sales and don’t have a presence in the state.
- E-commerce businesses should consider technologies and consult with experts when determining sales tax rates to avoid penalties and fees for unpaid tax.
- This article is for e-commerce business owners who want to stay on top of their sales tax obligations.
Staying updated on changing sales tax laws can be challenging for even the savviest entrepreneurs and small business owners. Add in legislation changes, and you’re looking at myriad regulations to sort through. Understanding sales tax laws is especially complex if you’re in e-commerce and conduct business with customers from multiple states.
We’ll explain what e-commerce business owners need to know about interstate sales tax regulations, what you can do to stay on top of these changes and common mistakes to avoid.
Aside from complex sales tax regulations, e-commerce challenges for business owners also include ensuring proper cybersecurity practices, keeping up with competitive pricing and order fulfillment issues.
Do you have to collect and remit sales tax on e-commerce sales?
If you do a substantial amount of business in any state or meet other qualifications, you must assess sales tax, collect it and remit the tax to the proper tax authorities within the prescribed time. Except for wholesale items, raw materials and sales made to nonprofits, U.S. retail businesses can be required to collect sales tax on the goods they sell.
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As a small business owner selling online, you must monitor constantly evolving online business laws for every state where you do business.
What is a sales tax nexus and how does it affect e-commerce businesses?
A sales tax nexus determines the relationship between your business and the state or taxing jurisdiction. For brick-and-mortar stores, this is typically easy. The store’s physical presence establishes the relationship between the taxing jurisdiction and the business.
However, in 2018, a Supreme Court ruling in South Dakota v. Wayfair Inc. changed how e-commerce businesses collect and remit sales tax. States can now force out-of-state sellers to collect sales tax even if the sellers don’t have a physical presence in the state.
Here’s what you need to know about the sales tax nexus.
1. Sales tax nexus regulations differ from state to state.
The amount of sales or the number of transactions a seller can have before they must start collecting tax varies by state. For example, in South Dakota, the state can require any business that delivers more than $100,000 of goods or services or totals 200 transactions annually to collect and pay sales tax. Other states have their own established rules about collecting and remitting sales tax.
2. Businesses that sell to multiple states must understand state regulations.
For businesses with goods theoretically available to all customers in all 50 states, determining how much sales tax to charge — if any — and how to remit the tax to the proper taxing authority can be daunting.
If your small business mails three $15 products to a customer across the country, you likely don’t have to worry much about these sales tax laws. It’s doubtful that any state will create a law where small, occasional sales result in paying a sales tax.
However, businesses that sell more significant amounts must take note of local and state business regulations.
3. Several factors go into determining the sales tax nexus.
The sales tax nexus changes from state to state. How it’s determined can depend on several factors, including:
- Where inventory is stored
- Amount of product sold to or in a particular state
Laws about e-commerce sales tax are being updated continually, so you must research the requirements on each state’s website to ensure you are in compliance.
Check with a tax authority, small business tax expert or certified public accountant (CPA) to determine how much sales tax you may need to collect.
How do you adjust to new sales tax laws for e-commerce?
Keeping on top of ever-changing e-commerce sales tax laws is no easy feat. As you prepare your business to determine eligibility, how much sales tax to charge (if any) and how it will be collected, tracked and paid, you’ll need to set up new systems and processes that help ensure you meet your responsibilities.
“Along with the obvious changes that are going to need to be implemented from an accounting perspective, a huge portion of the impact of this decision is going to be technological,” said Christian Gainsbrugh, the founder of LearningCart. “Many people take sales tax calculations for granted but managing and calculating those rates behind the scenes is no small feat.”
Here’s some advice for staying on top of sales tax laws for e-commerce.
1. Set up a system for tracking e-commerce sales tax laws.
Large online retailers hold an advantage over smaller sellers in this scenario. For example, companies like Amazon can throw money and employees at sales tax law issues to quickly adjust to changing regulations and compliance issues.
It’s more challenging for small businesses to keep up with the complexities. “Although some states like Maryland have a standard flat sales tax rate, some like South Dakota base it on the city, and other states like Washington calculate sales tax based on the county the purchaser is in,” Gainsbrugh explained. “With the way county lines are drawn, you literally could have a customer on one side of a street with one tax rate and another across the street with a completely different tax rate.”
While sales tax laws can be complex, smaller online retailers with fewer resources can turn to technology for help. Specifically, software to help manage the complexity of different sales tax laws is crucial. The best point-of-sale (POS) systems integrate with your business’s accounting software and can process various state sales tax laws.
Shopify, Square, Clover, PayPal and Vend all offer sales tax solutions in addition to their POS services. Read our in-depth review of Shopify, Square review and review of Clover to learn more.
2. Monitor sales tax rates in all states.
Many states follow the monetary guidelines of $100,000 in annual sales, outlined in the Supreme Court case for South Dakota. Other states haven’t enacted South Dakota’s exact standards, but you can use those numbers to prepare if a state you do business in hasn’t yet set laws. If you exceed that hypothetical threshold, you should closely monitor the sales tax laws in that state to remain compliant.
For example, if you sell more than $100,000 worth of goods or have more than 200 transactions annually in a state that hasn’t adjusted its laws since the South Dakota v. Wayfair ruling, you should check the tax laws in that state frequently for changes and follow the legislation. If you collect sales tax from customers, remit the tax back to the state. Failure to do so can result in the violation of legal guidelines.
Staying aware of sales tax rates and other small business tax changes helps you stay in control of your finances, maximize all tax benefits and run a profitable business.
Tips for managing e-commerce sales tax
Managing e-commerce sales tax takes effort, cooperation and assistance. These tips can help e-commerce retailers properly track state laws and collect and remit e-commerce sales tax to the proper tax authorities.
1. Track every penny — literally.
One of the best things that you can do to stay on top of your sales tax obligations is to keep meticulous records, said Luca CM Melchionna, a managing member of Melchionna PLLC. The best accounting software solutions help you track invoices and sales so that you know exactly where your sales come from.
“Be sure to work with an attorney and a CPA with experience in this area,” Melchionna advised. “In many states, sales tax reporting obligations are recurring. It is important that small retailers maintain impeccable documentation at the time of each sale.”
2. Track each state’s payment deadlines.
When you must remit the sales tax you collect on e-commerce sales varies by state. Create a calendar or mark up an existing calendar with each state’s due date to ensure payments are sent to the proper authorities on time.
“When you register with a state, you should be assigned a filing frequency (monthly, quarterly, annually or other),” said Scott Peterson, vice president of U.S. tax policy and government relations at Avalara. “These frequencies each come with their own due dates. Although the due date may officially be the same day of the month each reporting period, these can fluctuate due to holidays, weekends and other factors. So, it’s crucial to check the exact dates rather than just assume that you know when they are.”
Use a shared business calendar app to track sales tax remittance due dates for the states where you do business.
3. Know how to remit sales tax.
Each state has its own requirements governing how to file and remit e-commerce sales tax. Some may accept a check and some states require you to pay online. Have a clear understanding of your obligations, so you’re not hit with any surprises at filing time.
4. Apply for sales tax permits as necessary.
If you’re close to reaching the minimum sales thresholds in a state, you should apply for a sales tax permit before you reach that threshold. You must be registered with a sales tax permit before you can collect sales tax from customers. It’s a lot of work to get permits in various states, but it’s imperative to stay informed about sales tax rules and follow them in each state where you do business.
5. Understand the penalties for mistakes and delays.
Knowing the penalties for late or incorrect payments for each state is as crucial as knowing the law. Not complying with the law, even accidentally, could cause ongoing issues for your business, including legal action.
6. Consult an expert.
If you’re unsure of your tax responsibilities in a particular state, contact a tax professional, CPA or attorney. Their insight can help you make the best decisions for your e-commerce business and ensure you’re collecting and remitting sales tax correctly. Additionally, they can advise you about taking advantage of tax deductions for which you’re eligible.
Compliance mistakes to avoid
“We all make mistakes,” said Peterson. “When you’re a small business filing sales taxes, it’s easy to do. After all, chances are good that you’re not a sales tax expert.”
Peterson shared three common mistakes small businesses make regarding their collection of sales tax.
1. Failing to keep track of different sales tax rules for different states
As mentioned earlier, every state has its own rules and procedures. You may be dealing with several due dates, filing frequencies, formats, late penalties and other variables, and it’s easy to mix them up.
States continue to change rules for political reasons and due to pressure from constituencies. For example, in 2022, Louisiana stopped charging sales tax on diapers. Also in 2022, Florida reduced the sales and use tax on mobile homes from 6% to 3%.
“Making sure you are getting it right for each state also means making sure you are updated on the latest requirements, which can and do change,” Peterson added.
2. Reporting incorrect sales tax numbers
Many states require you to break down collections based on local jurisdiction, which adds another layer of complexity. Peterson noted that it takes careful computation and checking to ensure you get your numbers right.
You also must ensure you calculate the amount of the sale subject to sales tax correctly. For example, some states tax food items while other states do not.
3. Not filing because you didn’t collect any tax
Don’t assume that if you didn’t collect tax, you don’t have to file for that reporting period. Most states require you to file every reporting period, even if you didn’t collect anything. Disregarding this requirement could result in late or non-filing penalties.
The 10 best states for small business taxes include Wyoming, South Dakota and Alaska, while some of the worst include New Jersey, New York and California.
What’s next for sales tax for e-commerce?
Since the South Dakota v. Wayfair ruling in 2018, states have implemented many changes to e-commerce sales tax regulations. Changes are likely to continue, which is why it’s essential for your business to stay up to date.
While it may seem nearly impossible for a small business owner to stay updated on sales tax changes in 50 states, by properly managing sales tax responsibilities and staying informed, you can succeed.
By staying organized, conducting ongoing research on state law changes, purchasing software programs, if needed, and registering for sales tax permits in each state where required, you can ensure your business complies with ever-changing tax codes. Knowing you are handling your sales tax correctly can give you peace of mind, so you can concentrate on managing and growing your business.
Sally Herigstad and Stella Morrison contributed to the reporting and writing of this article. Some source interviews were conducted for a previous version of this article.