Simplifying Online Sales Tax With Three Parts
So you've got an online business selling products, but when it comes to sales tax you're feeling a little (or a lot) confused. I hear it all the time from sellers on platforms such as eBay, Etsy, and Amazon, especially when the time to file sale tax reports comes around. I'm here to tell you that it isn't as complicated as it seems!
Take a deep breath and get ready. We're going to break down sales tax responsibilities into three easy parts, and I promise you're going to walk away from this post feeling informed and confident when it comes to sales tax for your eCommerce business.
The Factors That Affect Sales Tax Collection
The main questions I hear regarding sales tax from online sellers is: Who is responsible for collecting it? How do I know when I should collect sales tax? What do I do if I'm not the one collecting sales tax?
The first two questions can be answered by looking at three factors, and I'll touch on that last question once we go over determining your responsibility when it comes to sales tax. So here it is: the three factors to consider when determining if you should be collecting sales tax.
With the steady rise in online marketplaces like Amazon, eBay, and Etsy many states have implemented new tax laws that require online selling marketplaces to collect and remit sales tax on all sales made within their state in certain circumstances. The requirements for this vary greatly between states but we will save that for another post.
Currently, there are 39 states with marketplace facilitator tax laws in place with varying enforcement dates. This means that Etsy, eBay, Amazon, and similar online marketplaces are required to collect and remit sales tax themselves, meaning the individual sellers do not need to handle any sales tax for sales made within these states. If your business is based in one of the 39 states that currently have marketplace facilitator tax laws in place you may have to file sales tax forms stating that you are exempt if you sold on an online marketplace that collected sales tax on your behalf.
States that do not have active marketplace facilitator laws in place are:
Alaska, Delaware, Florida, Kansas, Louisiana, Missouri, Montana, New Hampshire, Oregon, Tennessee, and Puerto Rico (U.S. Territory).
The next factor to consider when determining your responsibility when it comes to sales tax is physical nexus. This one is pretty straightforward and will be the easiest for you to determine.
Nexus is defined as a connection linking two or more things together. Physical nexus is the physical presence of your business connecting it to a particular state. So what determines a physical presence? The short answer is: it depends. Each state has its own regulations when it comes to physical nexus (are you sensing a theme here?) but here are the main factors:
Brick and mortar location
Performance of services
Event or trade show attendance
Some states have instated an economic nexus threshold in addition to physical nexus, which means that even if you do not have a physical presence in a state, you could still be liable for collecting and remitting sales tax if you surpass a certain sales threshold within that state. Again, the specific numbers vary from state to state. As an example, if an online seller located in Washington has over $100,000 in sales or 200 individual sales that take place in Arkansas they are then required to collect and remit sales tax to the state for any following orders to Arkansas.
Putting It All Together
In summary, there are three main factors to consider when deciding whether or not you need to collect and remit sales tax for a particular sale. Does this state have marketplace facilitator laws in place, does my business have a physical presence in this state, and do I have a large volume of sales in this state? I've put together a helpful decision tree so that you can easily determine who is responsible for collecting and remitting sales tax in any situation! Make sure to download it for future reference!
If all this talk of sales tax and marketplaces and nexus is making your head spin, hop on over to my free Facebook group where you can get help with your specific sales tax questions! Plus, get exclusive access to live training, resources, and tips when it comes to bookkeeping and ensuring your eCommerce business is profitable and successful!
As always, you can email questions or topic requests directly to email@example.com.