Understanding the E-Commerce Sales Tax

Yes, I think we all can agree on something: taxes can be overwhelming. Doesn’t matter if this is your first time filing as a small business owner or you’ve been doing this for many years. We all get nervous as we file our taxes, second-guessing if we’re doing them correctly and efficiently. Well, to calm some of your anxiety, we’ll be discussing the e-commerce sales tax. Breaking down this tax is vital for entrepreneurs looking to move their brick-and-mortar stores online due to COVID-19. Online merchants also benefit from learning about the tax as it’s essential for managing a successful business.

If you feel that you need some help understanding this specific tax, reach out to a reliable tax consultant. Due to the ongoing COVID-19 outbreak, the CDC strongly encourages you to replace in-person meetings with phone calls or video meetings. Remember, tax consultants want to see you and your growing business thrive! They are willing to offer all the help they can!

Breaking down the e-commerce sales tax:

Most shoppers are familiar with the infamous sales tax, that small percentage added to the end of a sale transaction. In the past, retailers with a physical presence, such as offices and warehouses, were expected to collect sales tax in states where they had economic nexus. On the other hand, e-commerce businesses only collected sales taxes in the states where they had facilities.

In 2018, the Supreme Court gave states permission to define economic nexus more broadly to include e-commerce merchants with no physical stores. Due to that significant change, some states enacted remote seller laws that required online retailers to collect and remit sales tax.

Are e-commerce businesses required to charge sales tax?

The simple answer is yes. 45 U.S. states, along with Washington D.C. and Puerto Rico, all have their own take on the sales tax. Online businesses, who have sales tax in their state, are responsible for charging customers with the correct amount of sales tax and remitting the collected cash back to the state. Essentially, online sellers need to remember two basic rules when collecting sales tax: your business has economic nexus in the state your customer resides in and the product you sold is taxable in that state.

What is an economic nexus?

Ultimately, an economic nexus means there is a “significant connection” with your state. If you exceed a state-mandated dollar amount of sales in that state or make a certain state-mandated number of transactions in that state, you must charge your customers with sales tax. Since sales tax requirements vary from state to state, you need to conduct some research to find out what you need to accomplish to properly apply the tax to your sale transactions. Take a look below, we created an informational list that shows the various ways you could have economic nexus in your state:

LocationAn office, warehouse, store, or other physical presence of business.PersonnelAn employee, contractor, salesperson, installer, or other individual doing work for your business.InventoryMost states consider storing inventory a cause of economic nexus, even if you don’t have another place of business or personnel.AffiliatesSomeone who advertises your products in exchange for a cut of the profits creates economic nexus in many states.Drop shipping relationshipIf you have a third-party company shipping orders to your customers, this may create economic nexus.Selling products at a trade show or other eventSome states believe you have economic nexus, even if you’re only selling at that location temporarily.

References:

Dunn, Jennifer. “The Complete Sales Tax Guide for Online Sellers [Nexus By State Included].” BigCommerce.

Gonzalez, Elizabeth. “A Small Business Guide to E-Commerce Sales Tax.” The Blueprint, 2 Dec. 2020.

Rivera, Chris. “What to Know About E-Commerce Sales Tax.” CPA Practice Advisor, 12 May 2020.