An eCommerce business owner is most excited and looking forward to opening their online store, making the first design changes to their website, and choosing the right products to sell in their soon-to-be-open store.
But with this rush of excitement comes another worry: making sure sales and use taxes are paid. Without a doubt, eCommerce is the mainstay of the US economy. There is a lot of information about the amount of the hike that has been put on hold during the holiday season.
But the growth of eCommerce keeps getting better every day. No matter how bad the economy is, eCommerce businesses are not lacking in any way.
The most important benefit for many people is the ease of use, the number of options, and, of course, the ability to compare prices. But the United States has a big secret benefit: there is no sales tax. Internet businesses have had a very helpful tax loophole for a long time. The vast majority of purchases don’t have to pay sales tax, and this has been the case for a long time.
But because many state governments are having trouble with their budgets, this is likely to change. So far, this change hasn’t happened because everyone hates the idea of taxing Internet businesses. Consumers hate it because they’ll have to pay state taxes, businesses hate it because they’ll have to pay federal taxes, and governments hate it because they’ll have to pay federal taxes.
What Does “Online Sales Tax” Really Mean?
Most of the time, it’s a small part of the sales price. In this case, stores can collect the
needed sales taxes so that they could send those amounts to the right place. In the United States, some places have a sales tax. Washington, DC, is one of those places. Alaska, Delaware, Montana, Oregon, and Hampshire, on the other hand, do not have a statewide online sales tax. And you’ll see that the most states have a sales tax of between 4% and 7%, which is an average of 5.09%.
Almost 34% of all money collected by states comes from sales tax. States and other authorities use the money from eCommerce sales tax to pay for important things. And governments aren’t likely to stop using sales taxes to pay for infrastructure improvements any time soon.
The main reason we wrote this article was to let you know that if you own an online store, you can’t avoid paying sales tax. People who take it for granted and don’t worry about getting the right amount of sales tax and sending it to the right place have to pay huge penalties and fines for not following the rules.
You need to know that not only will it hurt your bank account, but it will also hurt your reputation in the market. Small businesses are hurt the most by these restrictions. They can also lead to an audit, which can be annoying and may cost money. So, it’s important to know what your eCommerce sales tax requirements are, whether you’re opening your first online store or expanding the online sales of your existing business to new regions and platforms.
Most Common Online Sales Tax Nexus Forms
On June 1, 2018, the meaning of the word “nexus” changed for good. That was the day the Supreme Court of the United States ruled in South Dakota vs. Wayfair, Inc. in favor of the state. Based on a concept called “nexus,” this decision let states force online stores to collect and send in sales tax.
What does nexus mean? It shows that there is a “strong relationship” between the online store and the state. Once nexus is established, online sellers are required to collect and pay sales tax based on the business they do in that area.
Here are the most common types of online sales links:
At the moment, all 46 states in the U.S. that have a sales tax have what are called “economic connection criteria.” Depending on the state, online retailers have to collect and send in eCommerce sales tax when they make more than a certain number of sales or spend more than a certain amount of money.
In some places, for example, an online seller may have to make more than $100,000 in sales before monetary nexus can be proven. Other states, on the other hand, might need at least 200 transactions to be sent to addresses inside the state before they can say there is a financial connection. Also, some states’ threshold criteria include resale or exempt products, while others do not.
Nexus of Physical Appearance
When you move your eyes around, this seems to be the easiest kind of nexus to understand. If you are physically in a state that charges sales tax, you must pay the sales tax of that state. But “physical presence” can mean a lot of different things. It means that online stores have to collect and send in eCommerce sales tax in every state where they sell goods or services.
Some places now require businesses that sell things at events like trade shows to file an online sales tax return. Another problem is that if you use drop shipping, the ship-to address could show that you have a physical presence in a state.
What happens to online sales tax when you sell things on Amazon, eBay, or Etsy? In 46 states, there is a “marketplace facilitator nexus.” That means the third-party marketplace where you sell may be responsible for collecting and sending sales tax. But that doesn’t mean you don’t have to be responsible. Different states have different rules about what isn’t part of their marketplace facilitator nexus requirements.
Things that are included in California might not be included in Idaho, for example. Online business owners who sell on a third-party marketplace should also know where their products are stored and sent. This could lead to a physical presence nexus in one state.
Click-throughs as a Nexus
Imagine that your online store is located in South Carolina. But you also sell your items on websites in other states, in addition to selling them on your own website. This could lead to something called “click-through nexus,” which means that you might have to pay online sales tax in those other states. This kind of link, called the “Amazon law,” was first put into place in New York state.
Groups of Networks
This time, let’s say you have a business on the Internet in Oregon. Still, you have contacts in two more states where you no longer have to pay sales tax. These affiliates from other states promote your products in exchange for a share of your sales. This kind of link can lead to something called a “affiliate nexus.”
Nexus Linked to Seller Who Doesn’t Collect
Let’s say that your online store is in Minnesota. Customers in South Dakota buy things from you, but you are not required to collect sales tax in South Dakota right now.
Still, you may have to give South Dakota tax authorities information about what your customers bought and let them know if you have non-collecting sellers use tax nexus. Similar rules are already in place in ten states and Puerto Rico.
How to Pay Sales Tax on Online Purchases
What happens when you meet the monetary nexus criteria (or any other type of nexus threshold) in a certain state? In terms of online sales tax, it is always the online shop’s responsibility to register for sales and use tax, verify exempt transactions with a valid exemption or resale certificate, and file returns.
The first thing you should do is: Get a permit to charge sales tax. This may be called a sales tax license or a seller’s permission in some states. On the website of the taxing authority with whom you have a nexus, you can find one.
How to Look at Sales Tax Online
After you get the sales tax licenses you need, you’ll need to know how to collect the right amount of online sales tax.
As a first step, you need to figure out where you will pay taxes on your sales. This is called “sourcing,” and it is different in each state. Some U.S. states that collect sales taxes online use a method called “destination-based sourcing.”
This means that if your Internet business is based in Orlando, Florida, and you sell something to someone in Tampa, you have to pay both the 6% Florida state sales tax and the 1.5% Hillsborough County sales tax.
When to charge sales tax online
In general, if someone buys a physical item from your online business, you must charge sales tax. This general rule is true for most of the SKUs that an eCommerce company sells to its clients. However, there are notable exceptions, such as books, devices, sofas, and beauty products.
Again, these are not allowed in some states but not in others. In some states, taxes are not charged on things like food and clothes. Also, these exceptions can sometimes make it to the level of the brand. For example, vegetables might not be taxed, but cooked meals might be. Also, products that are resold may not have to pay tax because the person who resells them is legally responsible for the eCommerce sales tax.
Also, corporations that don’t make money and state agencies aren’t allowed to collect sales tax on things bought in some places. Whether or not you have to collect sales tax on online purchases depends on the type of product and even the type of customer. However, the most important factor is something called “nexus.”
One Last Thing
If you have a small online store, you might be able to handle the sales tax on your own. But an automated solution could help if your business starts to grow or if you already sell your products in many states. The good news is that experts agree that the dropship-empire eCommerce platform is the best tool. They promised to use the right strategies to make your online sales tax your superpower. We know that figuring out and sending sales taxes over the internet is not easy. But it doesn’t look like a loss.
If an eCommerce store owner uses Users eCommerce to run their storefront, they can use automation to help them figure out the right amount of eCommerce sales tax and stay in compliance.