April marks the beginning of tax season. At TaxJar, we work with over 8,000 online sellers around the world to help them manage and file sales tax. We’d like to address several frequently asked questions about ecommerce and shipping related sales tax to help you get started with this year’s filings.
Do I have to collect sales tax if I only sell online?
Yes, you do have to collect sales tax if you only sell online. This is a common misconception, the same rules apply to online sales as to brick and mortar sales. So if you are selling taxable items in a state where you have a sales tax nexus (more on that below) then you are required to collect sales tax, whether you sell the items online or face to face.
From which buyers do I collect sales tax?
In the U.S., retailers are only required to collect sales tax from buyers in states where you have sales tax nexus. A sales tax nexus is just a fancy way of saying a significant presence in a state. You’ll always have a sales tax nexus in your business’s home state, but other business factors often create nexus, too. These factors include: having a physical location, having an employee, salesperson or contractor, having an affiliate, or storing inventory for sale, among other things. You can see what each individual state considers sales tax nexus here.
How much sales tax do I collect from my buyers?
For brick and mortar sellers, this question is simple. You collect sales tax at the tax rate of the point of sale. In the case of a brick and mortar store owner, the point of sale is the place where you physical sell your item. For example, if you operate a store in Etna, Ohio you’d charge your customers the 7.25% Etna, Ohio sales tax rate.
However, when selling online, things get a bit trickier. In some “origin-based” sales tax states, the point of sale is still considered to be your location. But in most states, the point of sale is considered to be your buyer’s ship to address.
For example, say you live in Stamford, NY where the sales tax rate is 8%. But you make a sale to a buyer in Buffalo, NY where the sales tax rate is 8.75%. Since New York is a destination-based sales tax state, you would charge your buyer the 8.75% sales tax rate at their location.
To make matters even more complicated, in most cases if your headquarters is out of state but you have nexus in a state (maybe due to an employee or salesperson in that state) then you usually charge sales tax based at the destination-based rate.
These concepts can get tricky fast if you are expanding your business quickly across states. Consider integrating a sales tax API to help you automate the collection process accurately and systematically.
Are shipping charges taxable?
As with many things having to do with sales tax, the answer to this question is “it depends.” In this case, shipping charges are the amount you charged your customer to ship their product to them by common carrier (UPS, USPS, etc.) Some states consider these charges to be a necessary part of the sale, and therefore taxable. Other states do not consider these charges to be taxable as long as they are separately stated on your invoice to the customer. And some states charge sales tax on handling but not on shipping.
I paid sales tax when I bought an item. Do I still have to charge sales tax when I sell it?
It is another common misconception that if you paid sales tax on an item then your sales tax obligation has been fulfilled and you are not required to charge sales tax when you resale that item. Unfortunately, that isn’t the case. It’s easier to think of sales tax as a tax on the transaction rather than a tax on the item.
Fortunately, if you present a resale certificate at checkout, you can avoid paying sales tax on items you intend to resale. (Just be careful that you follow each state’s rules for using resale certificates.)
And if you do pay sales tax on an item you intend to resale you might have some options, such as claiming that tax back when you file your sales tax returns.
What do these internet sales tax laws in the news mean for the future of sales tax in the U.S.?
“Internet sales tax” has cropped up quite a bit in the news lately. To make a long story short, U.S. states want their money, and they feel that with the rise in online buying, they are not getting their fair share. After all, if you only have nexus in New York and make a sell to someone in Pennsylvania, you are not required to collect sales tax on that purchase, or remit it to the state. State lawmakers contend that online seller should collect sales tax from all buyers, not just buyers in states where they have sales tax nexus. As of right now, some court cases are making their way to the Supreme Court, while some sales tax bills have been floated in Congress. It remains to be seen if anything will change when it comes to selling online and sales tax, but it’s always a good idea to keep an eye on the winds of change!
Is there an easier way to handle sales tax?
Collecting, reporting and filing sales tax can be boring and tedious at best, and big waste of time and money at first. Sales tax isn’t profitable – you’re basically doing your state a favor by collecting tax from consumers on their behalf. And if you report and file the wrong amount, states can come back to you for penalties and interest, even if you made an honest mistake. That’s where sales tax automation comes in. Automating your sales tax reporting and filing saves you time and tedium, and prevents you from making costly, nitpicky mistakes. If you’re spending too much time filing sales tax returns, automate it and get on with your life!
We hope that these answers can help kick off the tax season this year and setup your business for success going forward.
Mark Faggiano is the Founder and CEO of TaxJar, a service that makes sales tax reporting and filing simple for more than 8,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
Shippo is a multi-carrier API and web app that helps retailers, marketplaces and platforms connect to a global network of carriers. Businesses use Shippo to get real-time rates, print labels, automate international paperwork, track packages and facilitate returns. Shippo provides the tools to help businesses succeed through shipping.