Many e-commerce sellers can feel overwhelmed when it comes to the topic of sales tax. Understandably so, as the sales tax rules for online sellers have another layer of complexity when compared to sales tax rules for brick and mortar businesses. This is because e-commerce sellers are often selling to people in different states or even different countries, and each location has unique rules about collecting sales taxes, which have to be reconciled. That can get very complicated indeed, so in this blog post, I’ll break down the 5 essentials every e-commerce seller should know about sales tax.
Watch the video linked below on 5 Essentials every e-commerce seller should know about sales tax:
#1 – The Rules Have Changed
You can’t rely on anecdotes from social media, forums, or friends and family. Tax rules are always changing and following outdated rules can get you in big trouble. Make sure you’re getting your information from an up-to-date accounting expert or a credible source (I share some links below in the section “Helpful Tools and Resources”).
#2 – Each State Has Different Rules
Sales tax varies by state and may even vary by jurisdiction within that state. So, again, when you’re seeking out advice on sales tax, make sure it’s specific to your state or it won’t be accurate. Yep, that’s pretty simple but hold on because it’s about to get more complicated.
#3 – Nexus
What is nexus? I know it’s not a word we normally use, so let’s define what nexus is. According to the Sales Tax Institute, sales tax nexus defines the level of connection between a taxing jurisdiction, such as a state, and an entity, such as your business.
Until this connection is established, the taxing jurisdiction cannot impose its taxes on you. So how is that connection established? One way is physical presence, which is what many brick and mortar businesses have been familiar with. You would collect sales taxes for the states where you have a physical presence. This could be the physical location of a store or possibly the location of warehouses. But, that’s not the only way, there is also economic nexus.
#4 – Economic Nexus
Economic nexus allows states to look at criteria beyond physical presence in evaluating whether you have a connection to that state. In June of 2018, the U.S. Supreme Court upheld the ruling between South Dakota and Wayfair, Inc., which allowed South Dakota to begin collecting sales taxes based on what we now call economic nexus. Since that ruling, about 40 states have now enacted their own economic nexus rules.
Here’s what you need to know:
- Each state has different economic nexus rules.
- Many have a threshold based on minimum sales or transactions.
- If you sell below the minimum in that state, you don’t need to collect sales tax.
- The state of Kansas has no threshold, so if you have ANY sales there, you may be on the hook for sales tax.
There are ways to automate and streamline the collection of sales tax in these states but hold on, you may not have to. What do I mean by that? Let’s talk about marketplace facilitator states.
#5 – Marketplace Facilitator States
If you sell via the big online marketplaces like Amazon, Wayfair, Walmart, Etsy, etc. then you are likely impacted by marketplace facilitator laws. Amazon, Walmart, Wayfair, Etsy, and other major online marketplaces are responsible to collect and remit sales taxes on your behalf if you sell on those marketplaces. (Yay!)
So while this is great, because you may not need to register to collect and remit sales taxes in these marketplace facilitator states, you still need to be aware that not every state is a marketplace facilitator state.
Helpful Tools and Resources
Yes, it is complicated. There’s a lot to keep up with, so I’m going to share with you some accurate, up-to-date resources you can rely on (courtesy of the sale tax experts at Avalara):
- Using the find your nexus tool, you can select the states in which you’re doing business, fill out some information, and learn about your sales tax exposure.
- With the sales tax laws by state tool, you’ll find really helpful tables that go state-by-state, showing you all of the different rules including economic nexus laws.
- With the state-by-state guide to marketplace facilitator laws, you can view each state and learn the unique facilitator laws and if you need to be collecting in any of the states you operate in.
Need Help?
Now that we’ve covered 5 Essentials every e-commerce seller needs to know about sales tax, you can see that there’s nothing simple about e-commerce sales tax laws. I encourage you to utilize the tools and resources shared above to gain clarity on what you need to do.
If you’re ready to get help from the pros, reach out to me. My firm VM Wasek specializes in e-commerce for creative online sellers, and we can help simplify sales tax for you so you can focus on elevating your business.
Feel free to use this link to book a free Discovery call with me. In the discovery call, I’d be happy to talk to you, learn about your specific needs, and see if my team is a good fit to help you elevate your e-commerce business and reach your goals.
