I’m willing to bet you didn’t start selling online because you were super excited to navigate the wild world of sales tax compliance.
Just like bookkeeping or counting inventory, collecting and filing sales tax is one of those business hassles that you have to attend to. To make matters worse, there’s no national sales tax, so each state gets to govern sales tax, and they all do it just a little bit differently.
This guide will walk you through what you need to know as a product seller about sales tax. Let’s dig in.
Who has to collect and file sales tax?
Forty-five states and Washington D.C. all have sales tax nexus. Retailers, whether you sell products online, in a brick and mortar store or somewhere else, are required to collect sales tax on taxable sales made in a state where they have “sales tax nexus.”
Sales tax nexus is just a fancy legalese way to say “significant connection” to a state. If you have nexus in a state, then that state considers you on the hook for charging sales tax to buyers in the state. You’ll always have sales tax nexus in your home state, but you may find that certain business activities create nexus in other states, too. They include:
• A location – an office, warehouse, store, or other physical place of business
• Personnel – an employee, contractor, salesperson, installer or other person doing work for your business
• Inventory – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
• Affiliates – Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
• A drop shipping relationship – If you have a 3rd party ship to your buyers, you may create nexus
• Selling products at a tradeshow or other event – Some states consider you to have nexus even if you only sell there temporarily
To help you determine whether or not your business activities give you sales tax nexus, you can find out what every state’s laws have to say about nexus here.
Is what I’m selling taxable?
The vast majority of products you sell will be taxable. However, states are allowed to decide what they consider taxable and nontaxable, so some states may consider things like groceries, clothing or textbooks to be nontaxable. You can find out more about what your state considers taxable and non-taxable here.
Register for a Sales Tax Permit
If you have nexus in a state, and sell taxable products, then your next step is to register for a state sales tax permit.
Don’t skip this step! States consider it unlawful to collect sales tax without a permit, no matter you intentions.
When you register, your state will assign you a filing frequency – usually either monthly, quarterly or annually. As a rule of thumb, the more sales you make in a state the more often that state will want you to file.
Collect Sales Tax
Once you have your sales tax permit, your next step is to collect sales tax from your buyers in your nexus state or states.
Make sure you set up sales tax collection on all of your sales channels in all of your nexus states. Also, be sure to take into account things like shipping taxability. Once again – every state is different, and that includes legislating whether or not sellers should include sales tax on the shipping charges they charge buyers. (Pro tip: You can forget worrying about that if you have free shipping to your customers!)
Most established online shopping carts allow you to collect sales tax from your buyers. You can see guides to setting up sales tax collection on the major online shopping carts here.
Report How Much Sales Tax You’ve Collected
Soon enough, that monthly, quarterly or annual sales tax due date will roll around. Now it’s time to report how much sales tax you’ve collected so you can prepare to file a sales tax return with the state.
This is one of the trickiest parts of sales tax, because states make this difficult. Not only do they want to know how much sales tax you’ve collected, they want you to break it down by county, city and other special taxing district.
This can be especially burdensome for online sellers, because in most states you are required to collect sales tax at the sales tax rate of your buyer’s location, and this can vary wildly all over the state.
This is where a good sales tax automation solution comes in. You can connect all the online shopping carts and marketplaces on which you sell, and your sales tax automation solution will give you a sales tax return-ready report. All you need to do is enter the numbers on your sales tax return and file online! Or, if you truly never want to touch a sales tax return again, you can even AutoFile your sales tax returns in most states.
And speaking of filing…
Finish Up: File Your Sales Tax Returns
When your sales tax filing due date rolls around, it’s time to file your sales tax returns. If you don’t choose to AutoFile with a sales tax automation solution, most states require that you do this online, through their state’s taxing authority (often called the “[State] Department of Revenue.”)
Keep these two things in mind when filing:
• Always file “zero returns” – File a return even if you didn’t make a sale or collect a penny in sales tax over the past filing period. States want to hear from you even if you don’t have any sales tax remit, and filing to file can even result in penalties and fines.
• Don’t forget your sales tax discounts – About half the states with a sales tax realize that collecting sales tax puts a burden on sellers. For this, they allow sellers to keep a very small portion (usually 1-3%) of the sales tax they’ve collected from customers. But this is only allowable if you file on time. So be sure to mark your calendar and claim your free money! See a list of states with sales tax discounts here.
And that’s it! You’re now well acquainted with the basics of sales tax. For a whole lot more, read our Sales Tax 101 for Online Sellers Guide or join us in our Sales Tax for eCommerce Sellers Facebook group!
TaxJar is a service that makes sales tax reporting and filing simple for more than 7,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!