The internet has been a great boon to the economy and made life easier for consumers and businesses alike. Unfortunately, it’s also created a whole new set of complicated rules you need to follow when selling products online. The good news is that once you know these rules, they’re pretty easy to follow. In this article, we’ll go over what internet sales tax is and why you need to charge sales tax for online sales, even when you don’t have an actual storefront in your state.
What is Internet Sales Tax?
At its most basic, internet sales tax is the tax attached to the selling of a product or service from an online retailer or e-commerce business owner. This tax is levied by the state where the product or service is sold rather than by the state in which the business is located.
Do You Need to Collect Sales Tax for Selling Online?
Yes, and internet-based retailers have a 2018 Supreme Court ruling to thank for having to collect sales tax from shoppers and fill out tax returns. Before that, sales and use taxes were established under Quill v. North Dakota in the early 90s. The decision called for states to utilize sales and use tax collection and remittance obligations on internet sellers based only on their economic activities in a state.
In the early days of the internet, sales tax laws didn’t require online sellers to collect sales tax. However, as computer use increased with popular products to sell online, the growth of internet sales skyrocketed. As a result, states saw revenue from sales tax from brick & mortar businesses dwindle. That led to them pushing to expand sales tax requirements to online sellers in a bid to recover state revenue, which changed the laws.
That push ultimately led to the Supreme Court case South Dakota vs. Wayfair, Inc. in 2018. The case, which is sometimes known simply as “Wayfair,” overturned Quill and led to new internet tax reforms.
The Wayfair decision says that states can require that out-of-state online sellers collect and remit sales tax, regardless of whether or not the retailer had a physical presence in that state. Because of the ruling, several states now have some form of law in place requiring internet sellers to collect and submit sales tax.
What Businesses Need to Pay Sales Tax for Internet Sales?
The Wayfair decision affects remote sellers and marketplace facilitators. And these online retailers don’t just have to worry about collecting your sales tax. They also need to ensure they’re paying the correct amount of sales tax on their products and services.
There are two ways in which businesses can do this:
- By establishing a physical presence or “nexus” in each state where they sell products or services
- By meeting the economic sales tax nexus threshold for that state.
Types of Sales Tax Nexus
Any remote seller should be aware of the different laws in different states. The provisions set by the states are called “remote seller nexus” or “sales tax nexus,” and they determine the physical presence in a state. If they meet the definitions below, they must register and collect sales taxes as a retailer.
- Click-Through Nexus: This nexus occurs when an out-of-state company sets up a click-through nexus in a state and an in-state company receives a commission for the referral of a specific amount of sales for the out-of-state company. This process is usually in the form of a link on a website that you have to “click-through” to get to the goods and services.
- Marketplace Nexus: This nexus comes into play when an organization operates in a state and provides e-commerce infrastructure. This infrastructure includes marketing, customer service and payment processing services.
- Economic Nexus: An economic nexus requires an out-of-state retailer to collect sales tax once they meet gross receipts activity or a certain level of sales transactions in the state they are conducting transactions.
- Affiliate Nexus: Online retailers who use in-state affiliates to market and sell their products have sufficient nexus that require them to collect online sales, remit these sales and utilize the taxable retail sales of services and tangible personal property. With an affiliate nexus, online sellers must collect sales tax from their affiliates.
Online Sales Tax by State
A majority of the United States has established rules for online state sales tax. For example, the state of Washington requires all companies conducting business in the state to collect and remit sales or use taxes on their taxable retail sales transactions unless certain exemptions apply (e.g., clothing under $100).
While there is no federal law requiring remote sellers with virtual (online) presence to collect and remit internet sales tax, the state’s taxing authority says that online retailers with no physical presence in the state collect their use tax.
States with an Economic Sales Tax Nexus
An economic sales tax nexus requires internet sellers to collect sales tax in states where their sales exceed monetary or transactional thresholds. As mentioned, states take the legislative position that an organization has an economic nexus if the annual retail sales of its goods and services exceed a monetary threshold or make a number of transactions. For instance, Arkansas has an economic nexus threshold of $100K or at least 200 separate transactions.
There are currently 46 states and the District of Columbia that have an economic sales tax nexus. Delaware, Montana, New Hampshire and Oregon do not have internet sales tax.
The states that do collect state sales tax and have economic nexus include:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
So, if your business sells products or services into one of the states listed, then you are required to collect and remit state sales tax on those transactions if you exceed their economic nexus threshold. The sales tax rate per state varies from a low of 1.76% in Alaska to a high of 9.55% in Tennessee.
States with a $10,000 Sales Tax Threshold for Collecting Sales Tax
There are none. Pennsylvania and Washington formerly had economic nexus legislation for a sales tax threshold of $10,000. In 2019, both states enacted sales tax rules that bumped up their tax thresholds to $100,000.
States with a $100,000 Sales Tax Threshold
Most states have an economic nexus threshold of $100,000. They include:
- Alaska
- Arizona
- Arkansas
- Colorado
- Connecticut
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentuck
- Louisiana
- Maine
- Maryland
- Massachusetts
- Minnesota
- Missouri
- Nebraska
- Nevada
- New Jersey
- New Mexico
- North Carolina
- North Dakota
- Oklahoma
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
States with a $250,000 Sales Tax Threshold
Alabama and Mississippi are the only states that have an economic nexus threshold of $250,000.
States with a $500,000 Sales Tax Threshold
Three states have a $500,000 economic nexus threshold: California, New York and Texas.
Selling Between States
If you are selling products or services between states, you need to be aware of the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA is a multistate agreement that allows remote sellers to collect sales tax at the rate of the customer’s home state.
For instance, if a business is based in Florida but sells into Georgia, then the business would collect Georgia sales tax. The SSUTA is an agreement between states that have agreed to simplify their sales and use tax laws to make it easier for out-of-state sellers to comply. Currently, 44 states (including Washington, D.C.) are members of the SSUTA.
How to Make Sure Your Business is Compliant in Sales Tax for Online Sales
It makes good business sense to ensure your online business is compliant with the varying sales tax laws. Here are some tips you can follow to make things easier:
- Determine if more than one state has a claim on your company (i.e., economic nexus). If so, then make sure to register as a seller in those states and collect their taxes.
- Register for a sales tax permit in your nexus state by contacting the department of revenue in the state where your business is located. This process is usually done through their website or by mail.
- Update your website’s sales tax settings to reflect the correct rates for the states in which you have nexus.
- Find out your product’s taxability. Each state has its own rules and regulations when it comes to what products and services are taxable. It is important to understand these rules to charge the correct amount of sales tax on your products. You can find this information by contacting the department of revenue in the state where your business is located or by visiting their website.
- Make sure your accounting software is configured to track sales taxes by state.
- Keep good records of all sales, including product and customer contact information. This precautionary step will help if there are any questions from the taxing authority about a specific sale.
Software That Can Help Make Sure Your Business is Compliant in Sales Tax for Online Sales
For online sales tax compliance, it’s important that you set up and start collecting sales tax for all your online marketplace and shopping. That means you need to check each platform and see if they have a sales tax collection feature. If so, it’s better to use software tools instead of manually gathering sales tax from your customers.
If your platform does not offer an automated sales tax tool, you can download TaxJar’s free Sales Tax Calculator for the WooCommerce plugin or Chrome extension. This plugin will automatically calculate the amount of sales tax you owe and generate a file for your customers. Then, you can upload that file to each marketplace or shopping cart where your products are listed.
After that, report and file sales tax by state and local municipality. You will need to do this on a quarterly or annual basis, depending on your state’s requirements.
Another way to ensure that your business is compliant in collecting and remitting sales tax for internet sales transactions is through the use of a reliable software platform.
Tax automation technology, such as Avalara’s AvaTax Compliance Cloud, automatically calculates accurate state-to-state transaction taxes using authoritative tables, rules engines and real-time updates from thousands of sources.
Tax laws are constantly changing, and Avalara’s tool checks and alerts you to any change to a law or tax rate. This relieves you of the burden of having to keep up with constant changes in tax laws and rates.
Image: Depositphotos
This article, “The Ultimate Guide to Internet Sales Tax” was first published on Small Business Trends