Benjamin Franklin famously noted that the only things you can be sure of in life are “death and taxes.” What he didn’t count on when he said this was the implementation of the sales tax and the resulting questions you may find yourself asking as an online retailer. In the most general of terms, if you’re in the business of selling anything, you may have to pay this particular tax. Here are four questions to ask about your business to determine your sales tax liability:
Question 1: Is it a business or a hobby?
First off, are you actually operating a business, at least in in the eyes of the Internal Revenue Service? If your store is very small or not making any money, the IRS might categorize it as a hobby. Hobbies don’t have to collect sales tax, but they also can’t claim any losses as deductions
The IRS considers an activity a business if “it is carried on with the reasonable expectation of earning a profit.” Even if you aren’t currently making a profit, if you’re spending significant time, effort, and money on your ecommerce endeavor, the needle points towards the business category.
Question 2: Am I selling taxable goods?
Sales tax is determined by each state – there is no federal sales tax – and every state has different rules about what goods are taxable. Five states (Oregon, Delaware, Alaska, Montana, and New Hampshire) don’t charge any tax at all (which is why your friends in the Northeast prefer to do their shopping in Delaware and New Hampshire). All states that charge sales tax have some exemption for wholesale goods, because the retailer will charge the customer sales tax. 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.
Question 3: 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 all over. How do you know which customers need to pay sales tax? In 1992, the Supreme Court ruled that mail-order businesses (which by extension includes ecommerce) only had to collect sales tax in states where they have a physical presence. However, things changed with the 2018 South Dakota v. Wayfair, Inc. case. The Court ruled that ecommerce businesses must now remit sales tax in each state where the business meets a volume and/or revenue threshold.
This is because the nature of economic “nexus” (the technical term for your business’s physical presence) has changed. Each state has a different definition of nexus, but generally a nexus includes your business’s stores, offices, and warehouses. Here’s a breakdown of how nexus looks in the post-Wayfair ecommerce landscape.
Question 4: Am I selling in a retail store or other physical location?
If you have a retail store or are selling your stuff in any other physical location (art market, pop-up shop, etc.), those taxes are straightforward: you’re bound by the state and local tax laws.
Looks like I need to pay sales tax…now what?
If you’ve determined that your online business needs to pay sales tax, you need to collect it from your customers and then remit it to the appropriate state agencies. Some shopping carts have sales tax calculators built in, so you can collect the correct sales tax on each transaction. If your cart doesn’t calculate sales tax, you can use software such as Avalara AvaTax or Tax Cloud, which integrates with your store’s shopping cart. If your cart is compatible with eCC Desktop, you can use the AvaTax add-on within eCC Desktop to calculate sales tax as the order is posted to QuickBooks.
We hope this article has given you a little insight into the world of sales tax. Things are a little more complicated in the 21st century than ole’ Ben probably predicted in his day!