The information in this article applies to U.S. sellers and sellers who remit sales tax in the U.S. only.
If you’re an online retailer, chances are you have to deal with sales tax. And by “deal with sales tax” we mean register for sales tax permits, figure out when and how much sales tax to collect, and make sure you file your sales tax returns on time, every time.
It’s enough to make your personal tax requirements seem like an April breeze.
To add to the stress, January is an especially taxing time for online stores – pun intended. No matter if the state(s) in which you are required to file a sales tax return asks you to file monthly, quarterly or annually, the first month of the year is traditionally a sales tax due date for just about everyone. And here you thought you were going to get to enjoy a respite after the holiday avalanche – not so fast.
Sales tax can be tricky – especially for sellers who only deal with it once a year. So to put your mind at ease, we developed a step-by-step guide to handling sales tax this January and beyond.
Step 1: Figure out where you have sales tax nexus
Sales tax nexus is just a fancy way of saying a “significant presence” in a state. Forty-five states and the District of Columbia require merchants to collect a sales tax, and that means you, as an online seller, must collect sales tax in states where you have nexus.
Figuring out your nexus is one of the first steps a new online seller must take. It’s pretty easy to see that if you operate out of a state, you have a significant presence there and thus have nexus. But, you may also have nexus in a state if you have an office or employee there, if you store goods in a warehouse there or perhaps if you travel across state lines for a craft fair or tradeshow. The line here can blur, making it hard to figure out where you have nexus.
Here are some questions you can ask yourself to determine whether you have sales tax nexus in a specific state:
In which states do I have…
- An office?
- A store or other physical location?
- An employee or employees?
- Products stored in a warehouse or other venue?
- Presence at a trade show, craft fair or other physical location?
After asking yourself these questions, you’ll have a list of one or more states in which you will more than likely have sales tax nexus. If you have any questions about nexus, you should contact your state’s Department of Revenue.
Step 2: Register for a sales tax permit
If you have nexus in a state, that state requires you to register for a sales tax permit before you begin collecting sales tax. Head back over to your state’s Department of Revenue (or equivalent state agency) and register for your permit to collect sales tax.
States use sales tax collected from all retailers with nexus to pay for public utilities including education, transit and more. When you register, the state will tell you when they want you to file sales tax returns and pay what you’ve collected back to their coffers. Most of the time they’ll ask you to file either monthly, quarterly or annually.
Sometimes there’s no rhyme or reason to a state’s filing cadence. One state may ask you to file annually, while another wants to see a sales tax return from you monthly. Either way, filing appropriately for your state isn’t something you want to forget. Most states consider it unlawful for you to collect sales tax without a permit.
Step 3: Collect sales tax
Once you’ve determined where you have nexus and are signed up for your sales tax permit, it’s time to begin collecting sales tax from customers. Remember, you only have to collect sales tax from customers in states where you have sales tax nexus.
Nexus in Texas + Buyer in Texas = Yes! Collect sales tax
No Nexus in Texas + Buyer in Texas = No need to collect sales tax
You’ll need to set up your sales tax collection through the individual channels on which you sell. If you are a Bigcommerce client, the process is pretty simple.
Step 4: Report how much you’ve collected
Up until this point, sales tax has been pretty straightforward, but this is where things start to get more complex.
First, you need to figure out how much sales tax you’ve collected from your buyers. If you only sell on Bigcommerce, pulling a report detailing all the sales tax you’ve collected is pretty cut and dry. Things get more complicated, however, if you sell through multiple channels – i.e. on Etsy, Amazon, eBay – or accept payments in-person or via brick-and-mortar.
Beyond pulling together your omnichannel sales information, there’s still the matter of arranging the information in a way states want to see it. More than half of U.S. states are destination-based sales tax states, meaning they require sellers to charge sales tax based on the buyer’s ship to address. Then, when it comes time to file a sales tax return, they require you, the merchant, to break down how much sales tax you collected by locality, such as by county, by city or by special taxing district – or all of the above.
If you choose to do this manually, it may involve looking up the zip codes of individual sales and comparing them to a tax table for your state to determine how to code each sales tax transaction. This can be a time consuming mess.
Fortunately, technology now exists to rescue you from spreadsheets and tax tables. There are solutions out there that allow you to integrate all of your sales channels quickly and easily calculate how much sales tax you collected from customers. These solutions will even prepare a return-ready report or file your sales tax returns for you. Full disclosure: TaxJar is a version of such technology.
Step 5: File your sales tax returns
The next step is to file your sales tax returns with the state or states where you have nexus. Remember, if you have to deal with sales tax, you’ll most likely have to file at least one sales tax return in January.
Make sure you file on time, too. You’ll receive a penalty if you’re late. Plus, some states offer a sales tax discount if you’re timely, including Alabama, Arizona, Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Wisconsin and Wyoming.
It’s true: sales tax is complex. But if you can run an online store and turn a profit, then you can master this nitpicky administrative task. Do you have questions or comments about sales tax? Let us know in the comments.
Photo: Flickr, 401(K) 2013
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