The Online Sales Tax Landscape: What You Need to Know

ecommerce sales tax

Today, online businesses contend with more tax complications than ever, and the challenges certainly extend to online sales tax. Luckily, you can make the process a lot easier with a few simple steps. .

Check out our online sales tax guide for more detailed information on eCommerce sales taxes.

Sales Tax and eCommerce

Nearly every state in the US has a different sales tax that consumers must pay when buying taxable items in brick and mortar retail stores. Though this tax is usually pretty straightforward, it quickly raises a complicated question for eCommerce business owners—do they pay the sales tax of their home state, or the home states of their customers?

Over the last several decades, tax law has evolved to catch up with the digital economy. Eventually, regulators introduced eCommerce sales taxes in a bid to boost tax revenues. However, , eCommerce sales taxes simply extend original sales tax laws to the eCommerce realm.

Unfortunately, these laws quickly became extremely complex and overwhelming, and many businesses haven’t  kept pace. One 2020 survey found that just 41% of companies reported complying with the latest sales tax laws. 

eCommerce Sales Tax Basics

What makes e-commerce sales taxes so tricky? As of 2018, online businesses now have to pay sales taxes in any state in which they have a nexus, even if the business has no physical presence there.

A nexus is the amount of economic activity a business must have in a state to be required to pay taxes there. For example, Kentucky retailers with more than $100,000 in annual sales or over 200 transactions have nexus in Kentucky.

Nexus criteria varies from state to state. As a result, businesses must now keep track of the sales tax laws of every state in which they have customers to continue to comply with tax laws.

sales tax map

How To Know If You Need To Collect Sales

Though you usually need to collect sales taxes on eCommerce purchases, you won’t need to do so 100% of the time.

There are two general conditions you need to satisfy to pay taxes on a particular sale:

  • You must have a nexus in the same state as the given customer.
  • Your product must be taxable in this state.
    • Remember, not all products are taxable in all states. Some states do not charge sales tax for certain essential goods, like food or clothing.

If you can satisfy both condition, you must pay sales tax to state or locality.

4 Steps To Ensuring eCommerce Sales Tax Compliance

Use these four simple steps to calculate your sales tax obligation:

Identify Your Sales Tax Nexuses

No matter where your customers are, you will always have to pay sales taxes in at least one state: your home state.

You may also qualify for nexus if you , have employees, inventory, or significant economic activity in a state depending on its tax laws. Again, rules vary by state, so check local tax laws to confirm your nexus status.

Register for a Tax Permit 

Once you’ve established where you’ll need to pay sales tax, you need to register for a sales tax permit in every nexus state.

Typically, you can apply for a permit through the state’s Department of Revenue.

Collect the Sales Tax 

Now that you have your permits, you’re legally allowed to collect sales taxes for those states. In most cases, you can impose the correct taxes through your eCommerce platform, , like eBay or Shopify.

Report and File the Appropriate Taxes 

Keep track of your tax filing frequencies for each state. States can require monthly, quarterly, or annually payments on sales taxes. If you have nexus in multiple states, you might have to operate under different schedules for certain states.

You might also have to report the amount of collected sales tax for other states and taxing jurisdictions, so keep  track of this information.

Tips To Navigating the eCommerce Sales Tax Landscape

These eCommerce sales tax  tips will make collecting and paying taxes a little less painful:

Track Payment Deadlines for Each State

As you receive your tax permits from each nexus state, create a calendar to keep track of payment deadlines.

Also, take note of when deadlines fall on weekends or holidays because this scenario typically pushes back the due dates.

Ensure Sales Tax Compliance 

Monitor sales tax regulations in every state where you maintain a nexus. Even a seemingly small change can have disastrous consequences if you don’t plan for it.

Consider scheduling periodic check-in dates on your payment deadline calendar to combat this. These can help you stay on top of any future changes to your nexus status before they create a problem with the IRS.

Get Professional Help

Many business owners struggle with eCommerce sales tax, but you can avoid a lot of stress with the sales tax pros at Tax Hack.

Tax Hack’s sales tax experts can handle your business’s sales tax, so you can get back to your business

Our e-commerce tax and accounting services can help your business optimize its sales tax strategy with compliance and tax strategies that can save you  thousands. Get started now with a one-on-one strategy session with one of our tax pros!

Talk to a Tax Hack pro now to see how much time, money, and aggravation you can save with our eCommerce sales tax services!

About the Author

Miguel Alexander Centeno

Miguel Alexander Centeno is an author, speaker, and tax leader at Tax Hack Accounting Group. A former Big 4 tax manager, he represents taxpayers in all matters before the IRS, including the U.S. Tax Court. He has been quoted in the Wall Street Journal, Fox Business, and MSNBC on tax related articles and has testified before the U.S. House of Representatives as a part of hearings for the Tax Cuts and Jobs Act. A father of three, Miguel is an avid acoustic guitar player, gravel cyclist and once-a-week yogi.
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