What E-Commerce Sellers Should Know About Sales Tax Compliance

As sales increase for growing startups and ecommerce businesses, there are bigger financial and tax obligations that must be applied. Understanding how to properly collect and file sales tax are some of the administrative hassles that an online product seller must manage. Taxes are the cost of doing business, and accurately understanding the basics of sales tax can help your business avoid sales tax pitfalls.

Online sellers must collect sales tax in states or localities where they have “sales tax nexus”. While all states have different terms, sales tax nexus is generally defined as the business significant “presence” in a state. This presence can include, but not limited to,

Location: an office or other physical place of business

Personnel: an employee, contractor, salesperson, 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: You may need to create a nexus if you have a third-party ship to your buyers

Selling products at tradeshows or events: Some states consider you to have Nexus even if you only sell there temporarily.

After you have determined where you have sales tax nexus, you are required to register for a sales tax permit and begin collecting sales taxes in that state. You can register for a sales tax permit yourself or have a trusted accountant perform the task. Sales tax permits are free, with a few states that charge a small fee for registering. It is important not to skip this step as some states considers it unlawful to collect sales tax without a permit.

Once registered, list which states require a Destination-Based sales tax versus an Origin-Based sales tax. A destination-based tax requires the business to be responsible for tracking and reconciling different state and local taxes. For example, if the destination state tax rate is five percent, but the business is delivering it to a customer in a city, within that state, with a local tax rate of four percent, the business must charge a total sales tax of nine percent. Origin-based state laws will tax customers based upon the location of the business as opposed to that of the consumer. For example, if the business in located in a state with a five percent sales tax rate, all customers are taxed at a rate of five percent no matter where in the country they are located.

For more information on collecting sales tax online, contact us to speak with our trusted advisors to take the worry out of sales tax compliance for your growing startup.