Answers to 4 Common Sales Tax Questions
We hear ecommerce sales tax horror stories all the time. In this increasingly complex and changing industry, both new and experienced sellers are often confused about how much sales tax they should charge—or even if they should charge it at all. Let me be clear: collecting sales tax is not optional for ecommerce sellers. If your business has a significant presence, or nexus, in a state that collects sales tax, but you’re not collecting it at the time of sale, you are still liable for tax in that state, which means it comes out of your pocket. Up-to-speed on #ecommerce sales #tax law? Read this before you sell. #taxcompliance #unify Click To Tweet
That’s a clear start, but unfortunately, figuring out your local rate just scratches the surface of what you should know about sales tax. There are many variables. Sellers—who are usually not tax experts—are often left wondering if, when, and how much to collect and remit in sales tax. In the most general of terms, if you’re in the business of selling tangible products you may need to register, collect, and remit sales tax. To keep it simple, answers to these questions can help get you started in your sales tax self-assessment.
1. Am I selling taxable goods?
Sales tax is regulated by the individual states—there is currently no federal sales tax—and product taxability and rates vary by jurisdiction. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not charge sales tax. Generally, wholesale transactions are exempt from sales tax since the end-retailer will collect the relevant tax from the consumer. But you’re not off-the-hook if you are selling wholesale—you still need to collect and save those wholesale exemption certificates. Some states exempt items sold as ingredients or as parts for manufacturing. In many states, items such as groceries and clothing are exempt from sales tax as well. If you’re still wondering, do a search for sales tax requirements in your state.
2. Where is my business located and where are my customers?
When you have an online business, your office is located in one place but your customers are located all over. Who you need to charge and collect sales tax from? Since 1992, mail-order businesses (which, by extension, includes ecommerce) have only had to collect sales tax in states where they have a physical presence, but this might be changing. Since ecommerce has dominated retail landscape in the last 10 years, this ruling has been challenged by the states. In January 2018, justices announced they would hear South Dakota’s contention that the 1992 ruling is obsolete in the ecommerce era and should be overturned. According to a report in Bloomberg, The National Retail Federation, which represents both brick-and-mortar and Internet-only sellers, said it was encouraged by the court’s decision to get involved and provide some clarity on the issue.
The technical term for the physical presence of your business is “nexus” and it’s a hot topic these days. Why? Because the definition has evolved beyond your office and warehouse locations and it also varies by state. For example, your subcontractor located in another state and employees working from a home office create nexus for your business.
3. Am I selling in a retail store or other physical location?
Because of mobile payment processors, this one confuses some sellers. If you have a physical store or are selling your goods in any other physical location (art market, trunk show, pop-up shop, etc.), these locations are obvious and the sales tax burden is easier to determine. Keep in mind that independent sales reps can create a nexus too, even if they do not work exclusively for your business.
4. Looks like I need to charge and pay sales tax. How do I do that?
If you’ve determined that your online business needs to collect and remit sales tax, you need to collect from your customers and then remit to the appropriate state agency. Often shopping carts, platforms, and marketplaces have sales tax calculators built in, which makes it easier to collect the correct sales tax on each transaction. Be sure to discuss this with your web developer as well. If the shopping cart you use doesn’t calculate sales tax, there are likely tools and extensions that integrate with it. If your cart is compatible with Webgility Unify Desktop, you can easily use Avalara’s AvaTax add-on to calculate sales tax as the order is posted to QuickBooks.
As technology makes our lives easier, it simultaneously adds a layer of complication and change for which we all must adjust, and tax compliance is no exception.READ MORE