Online retailers must pay a state sales tax every January, or more often for others who qualify. The filing part is easy, but getting the correct information for that report can be tricky without proper automation and setup from the start.
Where Do You Have Nexus?
In 1992, Supreme Court justices ruled states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence, also known as a nexus, in the state. This rule continues to be upheld, but may not be the only law you must follow now or in the near future. The court ruled that the authority to enact interstate taxes remains a responsibility of Congress and therefore is subject to change should a bill pass.
Determining which state sales tax to charge your customers nationwide, or in other words the states where you have “nexus,” can be a challenge. Most find the following seven rules to be most critical. Consider these, and if you answer yes to any then you probably do have to collect and pay to the state in which you are charging a customer sales tax.
1. Do you have an office in the state you are selling to? If not, you do not have to collect or pay tax.
2. Do you have an employee in the state you are selling to? If not, you do not have to collect or pay tax.
3. Do you have a warehouse in the state you are selling to? If not, you do not have to collect or pay tax.
4. Do you have an affiliate in the state you are selling to? If not, you do not have to collect or pay tax.
5. Do you store inventory in the state you are selling to? If not, you do not have to collect or pay tax.
6. Do you drop ship from a third party provider in the state you are selling to? If not, you do not have to collect or pay tax.
7. Are you temporarily doing physical business in a state for a limited amount of time, such as a trade show or fair? If not, you do not have to collect or pay tax.
Click this map below from Tax jar to find even information about sales tax collection in each individual state.
Right now, 45 states and DC require merchants to collect sales tax. For states where your business does have nexus, you will be required to obtain a sales tax permit before you start collecting tax revenue. Some state permits are free and others cost a small annual fee. Upon completion, the state will provide you the rate you must charge and want you to pay, monthly, quarterly, or annually.
States are motivated to watch these carefully, so we advise not skipping this step 😉 This income goes to pay for things like public safety, school improvements, and more.
Will my cart charge taxes automatically so I don’t have to worry about this?
Online retailers’ shopping-cart software services very easily handle state sales tax transactions, and some can even provide the monthly, annual, or quarterly sales tax collected to make reporting most easily. Most frameworks like Magento and WooCommerce allow an administrator to select the states they must collect for, and the rate by state.
This way, if any user enters a state that requires tax, then at checkout the correct information/rate is all logged/noted and collected upon the final transaction taking place. More robust frameworks allow those retailers with multiple channels/store fronts to set the tax per channel so that no detail is missed. We will note that the work can be more tedious for more states you must collect for, as compliance just takes more time when you have more states to account for, sale by sale, state to state.
What if I do not collect tax?
You are not out of the woods, sorry. Many states still require a return, even if that return is what is called a “Zero Return.” This type of report simply tells the state that you didn’t collect taxes during that period. This is essentially a simple confirmation the state likes to document, no matter the amount. There can be penalties for not doing a return or for not doing that return on time, so don’t forget. Make sure you set your reminders.
This general guideline should hopefully set you in the right direction for your ecommerce tax filing needs. It's always best to consult with an accountant or legal professional on matters of tax law before making filing decisions.