E Commerce Tax Considerations
E commerce is a multi-trillion dollar industry. There’s no surprise that with the rise of internet users, companies have completely leveraged this into another mode of B2C sales.
With more sales, inevitably comes more tax regulation. Which is why it is important to understand e commerce tax considerations.
E commerce tax considerations differ slightly than businesses with a physical location.
States have rules surrounding if an e commerce business has taxable sales in the state.
Learning the different taxes applicable to your business is probably not what you had in mind when first starting your business. Federal and state income taxes are applicable to all businesses, online or not. The gray areas involve sales taxes.
Sales taxes are not always applicable. Typically, services are not charged sales taxes. For example, if you offer lawn mowing services, you don’t have to worry about charging your customers sales tax.
Sales tax always applies to tangible products. So if you decided to sell fertilizer, you would have to charge your customers a sales tax.
When you operate an online business, figuring out when, how much, and to whom you pay sales tax is difficult to maneuver. Largely because each state has their own way of applying sales tax on e commerce businesses.
Questions you need to ask yourself when thinking about e commerce tax are:
- Where are my customers located?
- Where do I store my inventory?
- Are my products sales taxable?
- When are sales taxes due?
- Who are they do to?
Sales Tax Nexus
Although you operate your business completely online, your first step in determining your sales tax requirement or if you have sales tax nexus.
Sales tax nexus is a business connection you have within a state. If you have sales tax nexus in a particular state, you are required to pay sales tax to that particular state.
For e commerce tax purposes, if you are not sure if you have sales tax nexus, consider the following triggers:
- Physical location. This includes an office or warehouse facility.
- Storage of inventory.
- Personnel. A person who is an employee, contractor, and/or salesman.
- Economic nexus. Many sales tax states have a threshold when sales tax is triggered. Either a specific sales number or number of transactions conducted in that state.
Sales Tax Permit
For every state you have sales tax nexus, you need to register for a sales tax permit. This means filing the appropriate paperwork with the state’s Department of Revenue. You will have the option of filing online or by mail, though online is typically faster.
Sales tax permits are free in a lot of states. Some states do charge a small fee of about $20.
States rely on sales taxes to fund different sectors like highways, school systems, healthcare, or public safety. They are very invested in companies who have nexus in their state and ensuring they collect, file and remit the correct amount of sales tax.
After being registered, the state will inform you of how frequently you need to remit sales taxes. Usually, you are given monthly, quarterly, or annual deadlines, which depends on the number of sales you have. The higher the product sales, the more frequent you’ll need to remit sales tax to a state. In most states, due dates for sales tax fall on the 20th day of the month following the reporting period.
For example, let’s say you are required to pay sales tax monthly. For your June 1st – June 30th period, your sales tax remittance would be due by July 20th.
Some states may have due dates on the 15th day or 25th day so it is important to confirm this information with each state you have nexus in.
Collecting Sales Tax
The most important consideration for e commerce tax is setting up sales tax collection on your online shopping carts.
Every online shopping cart gives you the option of adding in sales tax.
But before you can set up sales tax collection, you have to figure out if the state you have nexus in is an origination or destination state.
If you are located in a state that is an origin-based state, then the sales tax rate you charge would be based on your business location. This makes collecting sales tax easier since the rate applied would be the same for all of your customers in that state.
For example, let’s say you are based in Cincinnati, OH, which is an origin-based state. In Cincinnati, the sales tax rate is 6.5%. If you have a buyer in Cleveland, OH, you apply your sales tax rate of 6.5%. All buyers in Ohio should be charged the same rate of 6.5% because Ohio is an origin-based state.
If you are based in a destination state then you are required to charge a sales rate based on your customer’s shipping address. It is your responsibility to charge and collect the appropriate amount of sales taxes.
Let’s take an example. If you are based in California (an origin state) and you sell a product to a customer in Florida (destination state), you would have to apply a sales tax based on the customer’s address in Florida. Why? In most cases, the location of the seller is not a determinant of sales tax. It almost always depends on the customer’s location.
Are Your Products Taxable?
In order to determine your e commerce tax, you first have to determine if your products are even taxable.
Generally speaking, most tangible items are taxable. Everything from jewelry to computers to socks.
There are exceptions. Below are some examples of products that may be tax exempt:
- Digital downloads (i.e. music, books, etc.)
Determining which items are taxable largely depends on your state. A product taxable in one state may not be taxable in another state.
Are Shipping Costs Taxable?
Is shipping taxable? If you don’t charge your customers for shipping, then you don’t have to worry about answering this question. But if you do, the answer is it depends.
As with most issues surrounding e commerce tax, shipping taxability depends on the state your customer is located. Some states believe shipping is a necessary cost of e commerce sales. While other states consider shipping a separate cost and not taxable.
How is Shipping Taxed?
Let’s say you sell candles online for $15 and charge $8 for shipping. For your Georgia customers, they would need to be assessed sales tax on the $15 candle and $8 shipping. The total cost to the customer is $23.92 ($15 candle + $8 shipping) x 4% sales tax.
On the other hand, shipping taxability is different for your Maryland customers. No tax would be assessed on the shipping portion. The total cost to the Maryland customer would be $23.60 ($15 candle x 4%) +$8 shipping.
What About Drop Shipping?
Drop shipping is when products are shipped to customers directly from the manufacturer when sold by a retailer.
There are 3 things happening in a drop shipping scenario:
- A customer buys from you
- You buy from a manufacturer
- Products are shipped to the customer
Whether or not sales tax or shipping tax applies depends on if your vendor has nexus in your state and if you have nexus in your customer’s state.
If your vendor has nexus in your state, then they would charge you sales tax on the products you buy from them that are sold to your customers.
If you have nexus in your customer’s state, then you would charge sales tax on the products they bought from you.
Filing a Sales Tax Return
When your sales tax deadline comes around, you will have to report the amount of sales tax you collected.
The frequency of your reporting depends on the number of sales you earned in the previous period. The more you sell in a specific state, the more frequent you will have to remit sale tax to that state.
Every state has their own due date so it is important to keep up with each filing deadline. If you file a sales tax return late, you will be assessed late fees.
File a sales tax return even if you didn’t collect any sales tax. States want to know if you have a $0 return or if just didn’t file. Plus, it is a requirement for all sales permit holders.
How to File a Sales Tax Return
The hardest part of the e commerce tax is compiling all of your sales tax information. Once you have all of this information, you log on to your state’s tax filing system and file your return. Through that process, you will be prompted for payment and that’s it!
Some states require you to report all tax collected in every single district which can be daunting. Some states have dozens or even hundreds of sales tax districts. And if you are dealing with multiple states, it can feel overwhelming. The key is keeping detailed records and confirming you are applying the right sales tax rate.
Discount on Sales Tax
Collecting, remitting and filing sales tax is no fun task. This is why some states pay you a percentage of sales tax back as a “thank you” for filing early or on time.
The amount of the discount varies with the state. New York, for example, offers a 5% discount. While Alabama caps the discount at $400 a month.
Do your research. You don’t want to leave money on the table!
Monitoring Your Sales Tax
It’s good practice to stay on top of your e commerce tax considerations. Start by setting time aside every year and review your sales tax process.
Nexus in New States
As your business grows, you might find that your customers are coming from more and more states. In which case, nexus in those states may be created.
Learn the specific requirements of the new states you have nexus in. Learn if they are origin or destination states, sales tax rates, discounts for early filing, due dates for filing, and other requirements for selling products in that particular state.
Make sure that on all of your selling platforms are collecting sales tax accurately. All of your shopping carts should include an area for sales tax. Whether on your website, Amazon, Etsy or other platforms, you want to ensure a consistent and accurate presentation of sales tax.
Streamline Reporting and Filing
When dealing with e commerce tax, filing your sales taxes is a necessary part of the process. It is an obligation of your company. Consider using a tax software or an accountant to handle this task for you.
E commerce tax does not have to be hard. Though sometimes you might find yourself in a gray area when trying to decipher between nexus rules or origin vs destination treatment.
If you are struggling with sales tax rules or don’t know where to start, contact the experts at LYFE Accounting!