There’s nothing simple about sales tax. In fact, I’d venture to say that it’s one of the more harrowing parts of running your eCommerce business.
Here are just a few reasons why it can be painful:
- Sales tax is administered at the state level – And every state’s sales tax laws are slightly different. You have to learn new rules for every new state you end up dealing with.
- The rates you should collect are different from state to state – Some states have a flat statewide sales tax rate (like Connecticut’s 6.35%), others have state plus county plus city plus other local rates. Five states even have no sales tax at all. And the complexity doesn’t stop there. Some states want you to charge sales tax to your online buyers based on the rate at your location. But most want you to charge sales tax based on the rate at your buyer’s shipping address. You always need to make sure you’re collecting the correct rate.
- Filing deadlines vary widely – Unlike with income tax, there’s no universal sales tax deadline. Different states want to hear from you at different frequencies (usually monthly, quarterly or annually) and on varying days of the month. This can make it hard to get into a sales tax rhythm.
While sales tax can be painful, it’s also a necessary part of running a legal business. This post will walk you through what you need to know about sales tax so you can worry about one less little administrative hassle!
IF YOU’RE NEW TO THE WORLD OF SALES TAX
If you’re a brand new seller or simply brand new to sales tax, here’s the lowdown on what you need to know to get started:
- Determine where you have sales tax nexus – Sales tax nexus is just a fancy way of saying “significant presence.” Every state defines sales tax nexus differently but you probably have sales tax nexus in a state if you run your business there, have an office or store there, store items in a warehouse there, have a sales rep or employee there, or even if you sell products at a trade show or craft fair there. You can read what each state has to say about nexus If you have nexus in a state, then you are required to charge sales tax to buyers in that state.
You’ll always have sales tax nexus in your home state, too. So unless you’re lucky enough to live in one of the five states without a sales tax, sales tax will likely be a fact of your life.
- Register for a Sales Tax Permit– Once you’ve determined you have sales tax nexus in a state, your next step is to register for a sales tax license in that state. Don’t skip this step – most states actually consider it illegal to begin collecting sales tax without a license.
At this time you’ll also find out how often you need to remit sales tax to the state by filing a sales tax return. Most of the time you’ll be asked to file a sales tax return either monthly, quarterly or annually. If you have nexus in more than one state, you may end up filing monthly in one state but quarterly in another.
- Set up Sales Tax Collection on All Channels – Your next step once you’ve determined where you have sales tax nexus and obtained your permit from your state’s taxing authority is to actually collect sales tax from your customers. We’ve written guides to setting up sales tax collection on the most common channels at our Learn Sales Tax
IF YOU NEED A SALES TAX CHECKUP
Maybe you’re been dealing with sales tax for a while but aren’t quite sure you’re completely compliant. There are plenty of reasons your online store could need a sales tax checkup:
- You’re doing business in another state – Maybe you hired a remote employee, started a drop shipping relationship or started storing goods in a warehouse across the country. All of these activities (and more) could affect your sales tax nexus and where you need to register for a sales tax permit.
- You’re selling on a new channel – Multi-channel selling is very profitable, but increases sales tax complexity exponentially, too.
Here’s what to check if you need a sales tax checkup:
- Check your nexus – Do you have nexus in a new state? Make sure you’re registered for your sales tax permit in that state.
- Make sure you’re collecting – When you sell on a new platform or start selling in a new state, make sure you’re collecting sales tax from buyers in all states where you have nexus on all platforms on which you sell.
- Check for rate changes – Sales tax rates change frequently. If your shopping cart of other platform handles sales tax rates for you, never fear. But if you’ve set your own sales tax rates it’s a good idea to make sure they’re still correct. Sales tax rates can change at any time but often change in July, October and January. You can double-check any sales tax rates you may be unsure about with this Sales Tax Calculator.
- Automate sales tax – As your business grows more complex, sales tax becomes more time consuming. It’s fairly easy to file sales tax in one state when you only sell on one platform, but as you add more states and channels your burden increases exponentially. Automate your sales tax compliance so you can focus on the more fun and lucrative parts of running your business!
Mark Faggiano is the founder and CEO of TaxJar
TaxJar makes sales tax compliance simple for eCommerce sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!