Understanding Sales Tax for E-Commerce

Whether you are considering selling products online or are already doing so, the next important question is, “What about sales tax?” As you may know, there are websites that allow you to make a purchase online from an out-of-state seller without paying sales tax. That will not last very long as the new Amazon sales tax laws go into effect across the United States, and as states realize how much sales tax revenue they lose each year. This is making it profitable and worthwhile for states to audit companies that sell products online. There is a lot of confusion when it comes to sales tax and selling online. In this article, I will attempt to demystify and simplify a rather complex problem. I will try to explain the difference between sales tax and use tax as well as your responsibility for reporting and properly collecting sales tax from online transactions and potential new problems you create due to what states call nexus.

Let’s tackle the easy issues first. If you sell products at retail from your location or from a website, you are responsible for collecting and remitting sales tax to the state you operate from. If anyone buys a product from an out-of-state seller without paying sales tax, then they are responsible for paying a use tax to their home state. Since our focus deals with online transactions, I will discuss sales tax as it relates to sales generated from your e-commerce site.

The easiest situation to address is when you operate from one physical location and sell products to customers in that same state. Regardless of where the sale is generated (in-store or online), you collect, file and remit sales taxes in your home state. If you sell products via an online store and you have nexus in another state, it gets more complicated.

What is nexus? According to the Sales Tax Institute, “Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state. Nexus is required before a taxing jurisdiction can impose its taxes on an entity.” In simpler terms, if you have a physical presence of employees, a warehouse, inventory or if you deliver into a state using your own trucks, you may have created nexus in that state.

Because most business are geographic in nature and operate out of a single state or area, I’ll address the ramifications of online sales taxes within a single state and recommend that you seek legal and accounting advice from your lawyers and accountants to address your particular situation. In any case, when making a decision to sell online through your website, it is important that you have a hosting partner and shopping cart software that has the capability to properly calculate sales tax and that you properly file and remit tax returns in a timely manner. Many, if not most, shopping cart hosting software has, at a minimum, the ability to calculate a single tax rate for all transactions. This may be adequate in simple instances where sales tax in your state is calculated based on the selling price of the item, if regardless of what item is added into the shopping cart, the rate of tax is the same across the board.

This formula works in a perfect world, but unfortunately, sales tax calculations rarely exist in simple instances. In fact, sales tax rates within many states may vary based on the item sold. Some items are taxed at different rates and some are not taxed at all. You will find that some states tax the total amount including shipping, while others base tax on the subtotal. In addition, some states base the tax on the shipping address versus the delivery address. It is important that you find a program that calculates the tax accurately for your state and the items sold in your online store.

Keep in mind that the objective of getting into e-commerce is to create an atmosphere where you can engage your customer in the entire sales process by offering cash retail products they can purchase from your online catalog. I can assure you that the benefits to complementing the in-store experience with a webstore or an e-commerce application that you and your staff can use to offer additional products and accessories to your customers can be both rewarding and profitable.

Your sales of retail items will increase. Your customers will get what they need from you as the trusted source. You can sell thousands of items you do not have to keep in stock in your physical store. You can differentiate yourself from the competition. And you can establish yourself as an authority in your community. You just need to be aware of the importance of choosing the right vendor for your e-commerce store and a hosting partner who understands the complexities of online transactions.

This article is the last in a four-part series. Each segment focused on best practices for building e-commerce sales. Read other parts of this series here.