How to Track Your e-Commerce Sales Tax

It’s a fact of life – every business has to pay taxes. Retailers have the added burden of collecting, tracking, and remitting sales tax to their local tax authority. If you’re an online retailer, you generally must charge sales tax to customers who live in any state where you have a physical presence. As an e-commerce business, how do you know how much you owe in taxes?

In this article I’ll help you find out how much you owe to the tax man. Where you find this information depends on whether you have a single tax rate or a variable tax rate.

If you only have one tax rate

If you’re using QuickBooks as your accounting software, keep in mind that QuickBooks is designed for businesses that have a standard tax rate. If you’re charging all your customers the same tax rate (for example if you live in a state like New Jersey that has a single tax rate), you’re in luck because you’ll be able to find this information in QuickBooks. (And if you’re not, don’t worry, we’ll cover that in the next section.)

In each transaction you’ll see the tax field at the bottom. If you’re using e-commerce integration software like Webgility, you can configure it to record taxes in the tax field.

How to Track Your e-Commerce Sales Tax
If you only have one tax rate, your sales receipts will look like this with the sales tax in the tax field.

QuickBooks compiles all these into the Sales Tax Liability Report, which will tell you how much you owe in taxes.

If you have variable tax rates

Many e-commerce businesses use variable tax rates, meaning that they calculate sales tax based on the customer’s location. Some states require this – and a big state like California can have over 100 tax districts!

If your shopping cart is calculating variable sales tax, or you’re using sales tax automation software like Avalara AvaTax, you won’t be able to use QuickBooks’ tax field, because it’s designed for a constant tax rate.

Don’t worry, you can still easily get a tax report. You’ll just have to pull a fast one on QuickBooks by making it think you aren’t collecting taxes at all, and then use the software that’s calculating the taxes to run your report.

First you’ll need to set QuickBooks’ default tax field to 0.0%. Next, when you set up e-commerce accounting automation software like Webgility to record your transactions in QuickBooks, configure it to record tax as a line item instead of in the tax field.

When an order is synced in QuickBooks, your transaction detail will look like this, with the correct sales tax as a line item and the “tax” field as $0.00.

accounting, sales tax
If you’re calculating variable sales tax rates, your sales receipts will list sales tax as a line item and the “tax” field will be empty.

Running a report for variable tax rates

As I mentioned above, you can’t use QuickBooks Sales Tax Liability report if QuickBooks thinks that there is $0 sales tax collected. So how do you now calculate your sales tax liability?

You can run a QuickReport in QuickBooks to give you a snapshot of how much you’ve collected in taxes, but it won’t tell you how much you owe to each tax district. To get this information, you’ll have go straight to the source. You need to run a sales tax report in the program that initially calculated your sales tax (shopping cart, tax calculation software, etc.).

So now that you’ve collected sales tax from your customers and you know how much you owe to each tax authority, all that’s left to do is submit those payments so you can get back to focusing on your business.

Want to learn more about managing your e-commerce accounting with QuickBooks? Schedule a QuickBooks Consultation with me, or click here to start a trial of Webgility.

Dustin Thede, Business Advisor