How to Administer Sales Tax for Your E-Commerce Business
You are running your very own online e-commerce store; How exciting, but e-commerce sales tax laws, not so much. We know sales tax can really kill your energy. This blog will better explain the various sales tax rules for e-commerce businesses.
When must your E-Commerce business start Administering sales tax?
Your eCommerce business must charge sales tax when you have nexus in a state.
“Nexus” refers to a commercial connection in that state. The term essentially answers the question, “Are you doing business here?”
States have different ways of judging whether you’re “doing business” in their borders, which is to say, they have different ways of defining nexus. It could be your physical presence in a state, or your amount of transactions there, or it could even extend to your marketing practices.
Here are the most common forms of sales tax nexus that affect eCommerce businesses:
- Physical presence nexus. If you use, in any capacity, “an office, place of distribution, sales or sample room, warehouse or storage place” — OR if you employ, in any capacity, “a representative, agent, salesman, canvasser, or solicitor” in that state.
- Economic nexus. If you make a certain number of transactions or reach a certain amount in sales. Click-through nexus. If you run ads or links on an in-state website, which channel potential customers and new business to you.
- Affiliate nexus. If you are affiliated with a business or individual in the state and sales are generated from this connection.
- Web cookies. If you us software or web cookies on in-state devices.
Where does your E-Commerce business have nexus in the United States?
Next, you should determine where your eCommerce business has nexus. Here is how you can get started.
- Ask yourself these questions to identify the states where you probably have nexus.
- Where do I have a physical presence? This could be a studio, warehouse, production site, or brick-and-mortar store.
- Where do I have employees or contractors
- Where am I storing products?
- Do my sales or number of transactions in a state exceed that state’s economic nexus threshold?
- Where do I have drop shipping vendors?
- Where are my affiliates in my affiliate program?
- Where do I travel to sell my products at a trade show, craft fair or other event?
- Once you have a list of states, investigate each state’s tax nexus policy to confirm whether your business applies. This can be a confusing and time-consuming task. You may want to consider reaching out to LNK Tax Group at this time.
When you do have nexus, here are the next steps for your E-Commerce business
Once you have nexus in a state, you need to set up as a tax-registered business and do everything by the book. That generally means following these three steps.
- Register for state sales tax permit: Apply with the State Department of Revenue. You must have a valid sales tax permit before you can legally collect sales tax. The tax permit is the very first step, and it is serious, too! If you begin collecting sales tax without the permit, some states may consider this tax fraud. The good thing is that many states allow you to register online. Usually you will either receive your sales tax permit number instantly, or within 10 business days. If you register via snail mail, it may take 2-4 weeks to receive your sales tax permit.
Here is some standard information you will need when registering for a sales tax permit:
- Your personal contact info
- Your business contact info
- Social security number (SSN) or Federal Employer Identification Number (FEIN) also known as Employer Identification Number (EIN)
- Business entity (sole-proprietor, LLC, S-Corp, etc.)
- Your NAICS Code (The NAICS code for online stores is 454110)
Note: There could be more levels than just a statewide sales tax! There’s county, city and other local sales tax rates too.
- Collect sales tax: Begin adding sales tax to every transaction in the state and set aside that amount for Step 3.
- Set up your shopping carts and online checkouts to collect sales tax.
- Configure them for “origin based” or “destination based” according to state laws. Make sure you have the right tax rates.
- Remit sales tax: All that sales tax you have collected from customers must be paid forward to the appropriate state agency.
- Take note of the frequency of returns (quarterly? annually?) and the deadlines for filing and payment.
- State sales tax returns do not just want to know how much tax you collected in the entire state. They want tax collection broken down by county, city, and any other locality.
Note: File “zero reports” if you did not collect anything in a certain jurisdiction where you are registered with a tax permit. Yes, you still must file. This is an obligatory check-in!
Contact LNK Tax Group for a free 20-minute consultation and see how we can help make your life easier when it comes down to your sales tax e-commerce needs.