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Do You Have to Collect Sales Tax for Ecommerce Sales?

Do You Have to Collect Sales Tax for Ecommerce Sales?

Do You Have to Collect Sales Tax for Ecommerce Sales? You do if you have either a physical or economic presence in a state and all states have different economic thresholds.

Let us start with the basics of eCommerce collecting sales tax.

Sales tax is a small percentage of a sale tacked on to that sale by an online retailer.

Sales tax is a “consumption tax,” meaning that consumers only pay sales tax on taxable items they buy at retail. Forty-five U.S. states and Washington D.C. all have a sales tax.

On top of this, most of those states allow local areas such as cities, counties, and other “special taxing districts” to have a sales tax. That is why you may see local areas, such as Miami Florida, that have an odd amount of combined sales tax. In Miami’s case, retailers must collect a sales tax of half a percent to subsidize indigent healthcare.

Do You Have to Collect Sales Tax for Ecommerce Sales?

As an online retailer, if you are responsible for collecting sales tax in a state, it is your responsibility to charge your buyers the correct amount of sale tax and remit the taxes collected back to the state.

Let us look at when and from which customers online sellers need to collect sales tax an internet sale.

The basic rule for online sellers when collecting sales tax is:

  • Your business has sales tax nexus in the same state as your customer.
  • The product is taxable in that state.

Let us explore these concepts a bit more in-depth.

  1. Sales tax nexus

Sales tax nexus is just a fancy legalese way to say “significant connection” to a state. If you, as an online retailer, have nexus in a state, then that state considers you on the hook for collecting sales tax to buyers in the state.

You will always have sales tax nexus in your home state. However, certain business activities create sales tax nexus in other states, too.

Ways to Have to Collect Sales Tax Sales Tax Nexus in the Different States

 A location: an office, warehouse, store, or other physical presence of a business.

  • Personnel: an employee, contractor, salesperson, installer, or other person doing work for your business.
  • Inventory: Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel.
  • Affiliates: Someone who advertises your products in exchange for a cut of the profits creates nexus in many states.
  • A dropshipping relationship: If you have a 3rd party ship to your buyers, this may create nexus.
  • Selling products at a trade show or other event: Some states consider you to have nexus even if you only sell there temporarily.
  • Economic nexus: You exceed a state-mandated dollar amount of sales in a state, or you make over a certain state-mandated number of transactions in a state. Quill v. North Dakota Supreme Court case changed the rules in most states
  1. What are the economic nexus laws?

To combat what they see as an unfair precedent set by Quill, some states prematurely passed laws that read something like, “If an online seller, even though they don’t have a presence in our state, makes more than $X in sales in our state, or conducts more than X number of transactions in our state, then they are required to collect sales tax from buyers in our state.”

These laws were knowingly contrary to Supreme Court precedent. But after the Supreme Court ruling in South Dakota v. Wayfair, states are now free to enforce these laws on businesses.

State laws on economic nexus vary. The sales thresholds vary from $10,000 to $500,000 in sales, and some states do not have a transaction threshold at all.

 Sales tax nexus conditions for each state

 Most definitions of nexus include the terms “doing business” or “engaged in business.”

Nexus Requirements by State:

Online sellers who did not have the means or the will to fight in court have capitulated and started collecting sales tax from buyers in states with sales tax nexus laws. Other online sellers, banking that these laws would not stand up in court against the Quill precedent, took a wait-and-see approach and will decide regarding sales tax collection after South Dakota v. Wayfair. Now that decision has been made.

Since the Quill physical presence requirement is overturned, states are free to pursue sales tax from online retailers who exceed the thresholds as stated in their economic nexus laws. However, there is also a chance that Congress could step in and pass a law regulating sales tax. Right now, we live in a sales tax Wild West, and we will be closely following all these decisions as they unfold.

If you meet economic nexus thresholds in some states, we recommend speaking with a vetted Accountant to determine your best course of action.

Below is the current list up to the point of this writing. Please consult the state websites to confirm. Please note that not all states have economic nexus laws.

Alabama

Threshold: $250,000/year based on the previous calendar year’s sales.

Alaska

Threshold: $100,000 or more in sales to the state, or 200 or more sales transactions into the state in the current or previous calendar year.

Arizona

Threshold: In 2020 the threshold will be $150,000, and then $100,000 in 2021 and thereafter.

Arkansas

Threshold: 200 transactions or $100,000 within the previous or current year

California

Threshold: $500,000/year in gross revenue on the previous or current calendar year’s sales

Colorado

Threshold: $100,000/year in gross revenue on the previous or current calendar year’s sales

Connecticut

Threshold: $100,000 in gross receipts during the 12-month period;/year in gross revenue AND 200 or more separate transactions on the previous calendar year’s sales

Georgia

Threshold: $100,000/year in gross revenue, or makes sales into Georgia in more than 200 separate transactions in the previous or current calendar year

Hawaii

Threshold: $100,000/year in gross revenue, or makes sales into Hawaii in more than 200 separate transactions in the previous or current calendar year

Idaho

Threshold: $100,000 of sales made into Idaho in the previous or current calendar year.

Illinois

Threshold: $100,000/year in gross revenue, or makes sales into Illinois in more than 200 separate transactions in the previous twelve months

Indiana

Threshold: $100,000 in gross revenue in the previous calendar year, or makes sales into Indiana in more than 200 separate transactions in the current or last calendar year

Iowa

Threshold (Starting January 1, 2019): $100,000/year in gross revenue in the previous or current calendar year

Kansas

Threshold: There is no exception for small sellers, so all remote sellers with sales in Kansas will meet economic nexus.  It is worth noting, however, that there is a conflicting opinion from the Attorney General due to the unique nature of this legislation, so sellers will want to monitor this threshold law closely in order to see if it lifts to a higher requirement or is overturned. As it stands now, the Department of Revenue is still requiring out-of-state sellers to remit sales tax.

Kentucky

Threshold: $100,000/year in gross revenue, or makes sales into Kentucky in more than 200 separate transactions in the previous or current calendar year

Louisiana

Threshold: $100,000/year in gross revenue, or makes sales into Louisiana in more than 200 separate transactions in the previous or current calendar year

Maine

Threshold: $100,000 in gross revenue in the previous calendar year or current calendar year, or makes sales into Maine in more than 200 separate transactions in the previous calendar year or current calendar year

Maryland

Threshold: $100,000/year in gross revenue, or makes sales into Maryland in more than 200 separate transactions in the previous or current calendar year.

Massachusetts

Threshold: $100,000 in sales over the preceding calendar year. The existing cookie nexus is $500,000 and 100 transactions in the current or prior year.

Michigan

Threshold: $100,000 in gross revenue in the last calendar year or makes sales into Michigan in more than 200 separate transactions in the previous calendar year.

Minnesota

Threshold: $100,000 in gross revenue in the last 12 months or makes sales into Minnesota in more than 200 separate transactions in the previous 12 months.

Mississippi

Threshold: Sales into Mississippi that exceed $250,000 in the prior twelve months

Nebraska

Threshold: Sales into Nebraska exceeding $100,000 or sales were made in 200 or more separate transactions in the current or last calendar year.

Nevada

Threshold: $100,000/year in gross revenue the previous calendar year OR 200 or more separate transactions in the previous or current calendar year.

New Jersey

Threshold: Sales of $100,000 in New Jersey, or more than 200 transactions in the state in the current or last calendar year.

New Mexico

Threshold: $100,000 in annual gross revenue from sales in New Mexico in the last calendar year.

New York

Threshold: $500,000 per year in gross revenue AND sales made into New York in more than 100 separate transactions in the last four quarters.

North Carolina

Threshold: $100,000/year in gross revenue, or makes sales into North Carolina in more than 200 separate transactions in the current or last calendar year.

North Dakota

Threshold: Sales into North Dakota exceeding $100,000 in the current or last calendar year.

Small Seller Exception
North Dakota law includes an exception for small sellers which will require sales tax collection by remote sellers ONLY IF their taxable sales into the state exceed $100,000 in the current or previous calendar year.

Ohio

Threshold: Sales of $100,000 or more annually or 200 or more separate transactions into the state in the current or last calendar year.

Oklahoma

Threshold: Sales in Oklahoma of at least $100,000 in the previous 12 months. Sellers who meet the threshold are required to elect to do one of the following on or before June 1 of each calendar year:

Pennsylvania

Threshold: Sales into Pennsylvania that exceeded $100,000 in the previous 12-month period are considered to have economic nexus

Rhode Island

Threshold: Sales in Rhode Island that exceed $100,000 or more, or 200 separate transactions in the state in a calendar year

South Carolina

Threshold: Sales of $100,000 in South Carolina in the previous or current calendar year

South Dakota

Threshold: Sales of $100,000 in South Dakota, or more than 200 transactions in the state in the current or last calendar year

Tennessee

Threshold: As of October 1, 2020, sales exceeding $100,000 in the state in the previous 12 months

Texas

Threshold: Sales above $500,000 in Texas in the previous calendar year.

Utah

Threshold: Sales of $100,000 or more in the state, or at least 200 individual sales transactions into the state in the current or last calendar year.

Vermont

Threshold: Sales of $100,000 or more in the state, or at least 200 individual sales transactions into the state during any preceding twelve-month period.

Virginia

Threshold: Sales of $100,000 or more in Virginia, or at least 200 individual sales transactions into the state if in the previous or current calendar year.

Washington 

Economic Nexus Threshold: Sales of $100,000 or more into the state of Washington in the current or last calendar year.

Washington DC

Threshold: Sales of $100,000 in Washington D.C. or more than 200 transactions in the state in the previous calendar year.

West Virginia

Threshold: Sales of $100,000/year in gross revenue the previous calendar year OR 200 or more separate transactions in the previous or current calendar year.

Wisconsin

Threshold: Sales of $100,000 or more annually or 200 or more separate transactions into the state in the current or last calendar year.

Wyoming

Threshold: Sales of $100,000 or more into the state, or 200 or more separate transactions into the state in the current or last calendar year.

  1. Product taxability

 Most tangible personal property – like furniture or toothbrushes – is taxable.

But some states make exceptions for certain products.

For example, clothing is not taxable in Pennsylvania. So, if you sell clothing to a customer in Pennsylvania, do not charge them sales tax!

As another example, the state of Illinois charges sales tax at a reduced rate of 1% on grocery items.

So, if you have nexus in Illinois and sell grocery items, make sure you charge that 1% sales tax rate instead of the full Illinois sales tax rate. The usual Illinois sales tax rate is 6.25% + any local rates that apply.

If you have sales tax nexus in a state, and the products you are selling are taxable in that state, then you are required to register for a sales tax permit and collect sales tax from buyers in that state.

  1. Steps to Sales Tax Compliance

 Once you have determined that you have nexus in a state and that you are selling taxable items in that state, your next step is to get compliant.

  1. Register for a sales tax permit.

Before you do anything else, get compliant by registering for a sales tax permit in your nexus state. You do this by contacting your state’s taxing authority (usually called the “[State] Department of Revenue.”) The state will require identifying information from you and your business and information about your business activities.

Don’t skip this step!

Most states consider it illegal to collect sales tax without a permit.

In their point of view, if you collect without a permit you are representing to your customers that you are collecting sales tax but pocketing the money for yourself.

Always have a valid sales tax permit before you begin collecting.

When they issue your sales tax permit, your state will also assign you a sales tax filing frequency. This is generally either monthly, quarterly, or annually.

As a rule of thumb, the higher your sales volume in a state, the more often the state will want you to file a sales tax return and remit the sales tax you have collected.

  1. Collect sales tax

Next, set up and start collecting sales tax online for all your online shopping carts and marketplaces. Each shopping cart and marketplace will have a way for you to collect sales tax, though some sales tax collection engines are more robust than others.

For example, Amazon has a very detailed and exact sales tax collection engine. eBay, on the other hand, only allows online sellers to collect one sales tax rate from buyers in each state.

Why is it important to be able to collect more than one sales tax rate per state? It is because of a concept called “sales tax sourcing.”

Let us go over the basics.

Origin & Destination-Based Sales Tax Sourcing

We already mentioned that each state can make its own sales tax rules and laws. One choice the state gets to make is whether to use “origin-based” or “destination-based” sales tax sourcing.

This simply means that states get to decide whether online sellers collect sales tax based on the sales tax rate of their business location (origin-based sourcing), or whether online sellers are required to collect sales tax at the customer’s ship to address (destination-based sourcing.)

Most states are destination-based.

From the state’s point of view, this assures that every local area receives the exact amount of sales tax collected from buyers in their jurisdiction.

But it can make sales tax collection, reporting, and filing very difficult for online sellers who have nexus in destination-based states.

  1. Report and file sales tax.

 When they issued your sales tax permit, your state-assigned you a sales tax filing frequency.

This means your sales tax due to date will roll around either monthly, quarterly, or annually (and sometimes semi-annually.)

Keep in mind that every state’s sales tax due dates are slightly different.

Most states want to hear from you on the 20th day of the month after the taxable period, but others want to hear from you on the last day of the month, or the 15th, or the 23rd, etc.

When your due date rolls around, your job is to report how much sales tax you have collected in each state. If the state just wanted to see one number, your job would be easy.

But to complicate matters, most states want to know how much sales tax you collected from buyers in each taxing jurisdiction. This means figuring out how much sales tax you collected in each state, city, county, and other special taxing jurisdiction in all of your nexus states. (And who on earth knows which city is in which county in a state without looking it up?)

This process becomes especially painful if you sell on multiple channels and must attempt to integrate more than one sales tax report. Fortunately, we live in a time where eCommerce sales tax software automation technology exists to make this process simple.

Once you have reported how much sales tax you’ve collected, your next step is to file your sales tax return and remit the sales tax you’ve collected from customers.

There are a couple of important considerations here:

 Always file “zero returns:” File a sales tax return by your due date, even if you did not collect any sales tax from your buyers over the taxable period. States want to hear from you even if you do not have any sales tax to remit. Some states will even levy a penalty on you for failing to file a zero return.

  • Take advantage of discounts: About half the states with a sales tax realize that asking retailers to act as tax collection agent is a burden. These states allow you to keep a very small percentage (usually 1-2%) of the sales tax you collect from buyers. Be sure to take advantage of this discount when filing in one of these states with a sales tax discount.
  • To be fully sales tax compliant, register for a sales tax permit in the states where you have sales tax nexus, then file and remit sales tax due by each of your sales tax due dates.
  • Other Important Ecommerce Sales Tax Facts for Online Sellers
  • With that, you have the basics you need to be sales tax compliant.

There are a couple of other interesting things to note about sales tax.

  1. Resale certificates

 In most states, your sales tax permit also serves as a resale certificate or seller’s permit. If you do retail arbitrage – buying items at retail with the intent to resell them yourself – then you are not required to pay sales tax on those items if you present your resale certificate to a participating retailer.

Now keep in mind that retailers are not obligated to accept your resale certificate. So, if you do have a valid resale certificate, but the retailer from which you are buying items to resell charges you a sales tax, you are often able to reclaim the sales tax you paid on your next sales tax filing.

Also, keep in mind that resale certificates are strict to be used to buy items you truly plan to resell. It is unlawful to use your resale certificate to buy items like office or packing supplies, or items for personal use.

The state considers this fraud and both you, as the reseller, and the retailer who sold items to you could face fines and penalties.

Conclusion

 It is essential to understand how taxes affect your business — and what tax software is best to use. If you use tax software like TaxJar, you can easily integrate your account with BigCommerce to automate sales tax calculations, reporting, and filings.

Do You Have to Collect Sales Tax for Ecommerce Sales?

Do You Have to Collect Sales Tax for Ecommerce Sales? You do if you have either a physical or economic presence in a state and all states have different economic thresholds.
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