Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
You're probably familiar with sales tax. It's that pesky thing you have to pay on most purchases, depending on your location. Many online sellers have asked themselves, "Do I need to collect sales tax for selling online?"
The answer is overwhelming, but it's not complicated as long as you have a tax guide like this one. Inside, we'll break down the basics of sales tax for online sellers and help clear up any confusion.
It's important for small business owners to be aware of their legal obligations. Fortunately, with a little knowledge about how tax law works, you can avoid many headaches by being compliant. We'll explain each part step by step so that by the time you finish this post, you'll be a bona fide sales tax expert. Let's get started!
What Does Internet Sales Tax Mean?
Also known as ecommerce sales tax, internet sales tax is the small percentage you collect when you make an income from selling your product online. You must accurately assess sales taxes and pay them to the proper state tax authorities.
In the US, most states require online businesses to collect sales tax. On top of this, you need to check the cities and countries you sell in and see if they have special taxing districts, AKA special assessment districts.
Let's say your online business is currently located in Los Angeles, California.
|Los Angeles Tax Breakdown as of 2022|
|Los Angeles City||0.25%|
|Los Angeles County Local Tax Sl.||1%|
|Los Angeles County District Tax Sp.||2.25%|
|Minimum Total of Sales Tax Rate||9.5%|
As of 2022, the city of Los Angeles, California, requires businesses to pay a 9.6% tax rate from their sales and revenue. The final computation of your tax rate is determined by the exact location of your business.
What Is a Sales Tax Nexus?
The exact location of your business determines the taxes you have to file. You're responsible for charging the correct sales tax and remitting the right amount of tax rate back to your respective state. But what does this fancy term "sales tax nexus" even mean?
It's a legal term of the state that means "to be on the hook." If you have a place of business, it means you have a physical presence that the state can tax you on. It could be a:
The Ripple Effect of the US Supreme Court Ruling
Generally speaking, online businesses don't pay sales taxes if they don't have a nexus. But for many years, states have been arguing about not being able to collect sales taxes from online business owners simply because these marketplace sellers don't have enough sales within their located state to generate taxes.
But the burden shifted back to the seller since the US Supreme Court ruling over South Dakota v. Wayfair in June 2018. Sales tax nexus laws have changed on when and how to collect taxes. As a result, complying with tax prerequisites for online retailers, especially small to medium businesses, has gotten much messier.
The ruling changed how online businesses collect and charge sales taxes. Many states have the power to charge sales taxes on online businesses even without a nexus. But as of now, the status of this new tax law hasn't been passed as a federal law, which is good news for small businesses in some states.
Are You Required to Collect Taxes in Other State Locations?
Yes, you still need to collect sales taxes in different states if you have:
- A physical presence: Whether it be an office, a store, or a warehouse far away from your home, you still need to comply with the sales tax laws of that state.
- Personnel: Do you have accountants, contractors, salespeople, or service providers managing or working for your business in certain states? Then, you need to file sales taxes based on the location of your production as well.
- Affiliates: Influencers who advertise your products or services also give you sales tax nexus in many states.
- Inventory: Storing your products can cause sales tax nexus in most states, even if you don't have a facility or personnel.
- Dropshippers: If you have a third party shipping your products to your consumers, there may also be sales tax nexus involved.
- Selling at trade fairs and events: Some states may require you to collect sales taxes even if you sell there temporarily.
- Economic nexus: If your business is booming and you're earning above the sales threshold in that state—as remote sellers, you need to collect sales taxes in a state if you reach a certain amount and number of sales in that state.
What Products Have Tax?
Most tangible property is taxable. But some states make tax exemptions for certain products.
Let's go back to California once more. If you are a marketplace seller that offers furniture, toys, and clothing, your products are subject to sales tax. In addition, some labor services and costs associated are even taxable if they are connected to producing new personal property.
But there are sales tax exemptions in California, such as:
- Selling food and many groceries
- Selling medicine prescribed by a doctor and certain medical devices
- Sales of items paid for with food stamps
- Sales to the US government
Important Reminders on How to Collect Taxes for Your Online Business
Once you have learned that your business is taxable, you must take steps to ensure tax compliance. This means filing the appropriate tax forms and making sure that your tax liability is up to date. By taking the time to file for tax compliance, you can help protect your business and avoid costly penalties.
Tax Permit Registration
Don't skip this crucial step when collecting sales tax. Unfortunately, most states consider it illegal and penalize businesses that collect sales tax without a tax permit. So instead, we suggest you contact the Department of Revenue of your state to learn more about registering your business for sales tax collection.
Sales Tax Filing and Report
Like each state's calculation of sales tax nexus, the state assigns how frequently you will file your sales tax—either monthly, quarterly, or annually. When your sales tax due date comes, it is your job to state how much you've collected.
Reporting your sales tax is easy if they want to see only the total of your sales tax collection. However, most states want to know how much you've collected in each county, city, state, and other special taxing districts in your nexus.
The verdict is in, and, as expected, the Supreme Court's decision in South Dakota v. Wayfair has had a massive impact on online sales tax laws across the US. As a result, states are now scrambling to put new rules and regulations governing how and when sellers must collect sales tax based on their customers' physical location.
Suppose you're an online seller doing business in more than one state. In that case, it's important to understand the implications of this ruling and take action to ensure you are compliant with all applicable sales tax laws.
Contact financial experts from Unloop today for help in navigating these murky waters and staying ahead of the curve for internet sales tax compliance.