Americans have been paying retail sales taxes for almost 100 years. While not every state collects a sales tax, it is handled at the state and local levels. There is no national sales tax.
Sales tax for e-commerce makes things a bit more complicated than they were when sales tax began in 1930. Managing sales taxes for e-commerce requires a clear understanding of when you're liable for collecting sales taxes.
Do you have questions about how sales tax for e-commerce businesses works? Keep reading as we explain the facts you need to know to be tax compliant.
What is E-Commerce Sales Tax?
When you purchase an item, a small percentage of the price of the item is tacked on to the sale by the online retailer. Sales tax is a type of tax called a “consumption tax." Only the consumer pays this type of tax on every taxable item they buy. Sales tax is collected in 45 states and Washington D.C. Some localities such as cities, counties, and special taxing districts also collect a sales tax on top of the state sales tax.
When Does Your E-Commerce Business Have to Collect Sales Taxes?
Online retailers are responsible for collecting the correct amount of sales tax if they're conducting business in states that charge a sales tax. The retailer has to be sure to collect the correct amount of taxes and then remit the amount collected back to the state. What is the rule for collecting sales tax for online sales? If your business has a sales tax nexus in the state in which your customer lives and the item is taxable in that state, you must collect sales tax on the sale.
What is a Sales Tax Nexus?
If you have a significant connection to a state, that's a sales tax nexus. A connection can be a physical presence as in an office, a distribution center, warehouse, etc. or you employ someone in the state, that's a sales tax nexus. An economic nexus results when you make a certain number of transactions or have a certain amount in sales in a state. Lastly, if you're affiliated with a person or business in the state and that generates sales, that's known as an affiliate nexus.
If your company has a sales tax nexus, it's time to set up as a tax-registered business. Register for a state sales tax permit. Now you're ready to collect sales taxes and remit them to the state or states.
E-Commerce Sales Tax
Now that you know the facts about e-commerce business sales tax, it's important to stay on top of the changes that are made to e-commerce tax regulations from year to year. It's your job to monitor changes and register for a sales tax permit in each state where you conduct business if required. If you need an all-inclusive nationwide sales tax service, we are here to help!
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