If you’re just starting your business, understanding sales tax is crucial. In this comprehensive guide, we will explain everything you need to know about sales tax and how it applies to your online business. Whether you’re an ecommerce expert or just getting started, this guide will provide you with the knowledge and confidence to navigate the complex world of online sales tax.
To begin, it’s important to understand the concept of “nexus.” Nexus refers to the connection a business has with a state or local jurisdiction that allows that state or jurisdiction to require the business to collect and remit sales tax on their behalf. There are two types of nexus that online sellers need to pay attention to: physical nexus and economic nexus.
Physical nexus is created through physical presence in a state. This can include having employees, property, or inventory stored in a state. Employees and property, including leased properties and vehicles, create physical nexus. If you have physical nexus in a state, you are required to register for sales tax in that state and collect sales tax from customers.
Economic nexus is a newer concept that came into play in June 2018. It allows states to require remote sellers to collect and remit sales tax based on their economic activity in the state, regardless of physical presence. Economic nexus is triggered when a seller exceeds a certain sales threshold or the number of transactions in a state. The threshold varies by state, but a general rule of thumb is 200 transactions or $100,000 in sales.
Registering for Sales Tax
When starting your online business, you need to determine where you have physical presence and register for sales tax in those states. This includes the states where you have employees, property, or inventory. If you exceed the economic nexus threshold in a state, you also need to register and start collecting sales tax from customers.
It’s important to note that economic nexus thresholds typically reset every calendar year. This means that you need to monitor your sales volume and revenue into each state on an ongoing basis to determine if you meet the threshold for each year.
Determine Taxability and Marketplace Facilitators
Once you have determined your nexus and registration requirements, there are two additional factors to consider: the taxability of your products and whether you sell through a marketplace facilitator.
Taxability of Products
Not all products are subject to sales tax. Some products may be exempt from sales tax, depending on the state. It’s important to consult the state department of revenue or a tax professional to determine if your products are taxable. If you sell exempt products, even if you meet the economic nexus threshold, you do not need to collect sales tax.
A marketplace facilitator is a platform or online marketplace that assists sellers in selling their products. Examples of marketplace facilitators include Amazon, Walmart, Etsy, and eBay. If you sell exclusively through a marketplace facilitator, they are responsible for collecting and remitting sales tax on your behalf. This means you do not need to worry about collecting sales tax yourself.
Simplifying Sales Tax Compliance
Navigating sales tax can be overwhelming for online sellers. However, by following these key steps, you can simplify the process and ensure compliance with sales tax regulations:
- Determine your physical nexus and register for sales tax in the relevant states.
- Monitor your sales volume and revenue into each state to determine if you meet the economic nexus threshold.
- Determine the taxability of your products and consult the state department of revenue for guidance.
- If you sell exclusively through a marketplace facilitator, they will handle sales tax collection and remittance on your behalf.
- Stay organized by regularly reviewing and categorizing sales data by state.
- Download the free economic nexus threshold by state guide to determine if you meet the threshold for each state.
By following these steps, you can feel confident and at peace with sales tax compliance in your online business.
Understanding and managing sales tax is an essential part of running a successful online business. By familiarizing yourself with the concepts of physical and economic nexus, determining the taxability of your products, and leveraging marketplace facilitators, you can navigate the complex world of online sales tax with ease. Remember to stay organized and consult with experts, such as LedgerGurus, to ensure compliance and minimize the burden of sales tax on your business.