Sales Tax 101: What Ecommerce Sellers Need to Know
Guest Post from Above The Fray Partner TaxJar
In many ways, it’s never been easier to create a wildly successful ecommerce company. With sophisticated, user-friendly platforms at our fingertips, a single person with a great idea can have a product built, sold and shipped right from their shoe-box studio in Manhattan or their basement workshop in Minnesota. But while some things are easier than ever when it comes to starting and running an ecommerce business, there’s one aspect that’s become more, shall we say, tricky: sales tax.
Whether you’re an entrepreneur just starting out or a financial leader in an enterprise business, sales tax presents a labyrinth of regulations that’s difficult to wrap your head around–and just when you feel like you have a handle on it, the rules change.
It wasn’t always like this.
It used to be that a business basically just collected sales tax in the state where it was based. But as ecommerce took off, states saw that they were missing a big piece of the tax pie. And they really, really like pie. So, South Dakota took Wayfair to court, and in 2018, the Supreme Court ruled that states could indeed make their own rules around sales tax, regardless of where the seller is located.
So, where does that leave us?
Today, 46 states and more than 11,000 local jurisdictions have different rules when it comes to sales tax. And your ecommerce business is responsible for keeping up with those rules, and collecting, remitting, and filing sales tax accordingly. It can get mind-blowingly complicated. But never fear, we’re here with a cheat sheet on what you need to think about when it comes to sales tax compliance.
The question of Nexus
In the world of sales tax, you’ll see the word “nexus” thrown around a lot. Basically, nexus is a fancy term for having a connection to a state that would require you to collect sales tax. For most states, having a physical location there means you have nexus (also called physical presence, or physical nexus). But beyond physical nexus, ecommerce companies need to worry about economic nexus — which is when you reach the threshold for collecting sales tax in a state based on your number of transactions or sales volume in that state. Those thresholds vary for every state — and they change from time to time. So you need to stay vigilant.
If you’re curious whether you have economic nexus in a state, check out its economic nexus threshold. And if you’d like to learn more about nexus, you can get a deeper dive in our Ultimate Guide to Economic Nexus.
Selling multi-platform: Amazon, eBay and other marketplace facilitators
In addition to having your own websites selling on platforms like BigCommerce, Shopify and others, many of you also sell through Amazon, eBay, Etsy and other marketplace facilitators. The good news is that in most states, marketplace facilitators are required to collect and remit sales tax on your behalf. But if you only sell on marketplace facilitators, that doesn’t necessarily mean that you can ignore sales tax altogether. Some states will still require you to register and file a return that shows your sales and tax remitted (even though the marketplace facilitator did the actual collecting).
What happens when you sell from both your own site as well as a marketplace facilitator– meaning you are collecting sales tax on one platform and not on the other(s)? Well, you need to keep tabs on both platforms. You can make your life easier with sales tax reporting tools that give you a single source of truth for all of your sales tax data, so you know where you stand.
But wait, there’s more!
Beyond the question of nexus and what platform you’re selling on, there are hosts of other questions to take into account when it comes to sales tax compliance. For starters, what products are you selling? Most tangible items will be considered taxable, but every state has their own rules as to what’s taxable and what’s exempt. Some states exempt (or tax at a lower rate) items like groceries and clothing. When it comes to SaaS or digital products, well, states are all over the map. Each has its own take on their taxability.
You’ll also want to look into whether the state in question is a destination or an origin-based state when it comes to taxes (meaning whether the tax rate is calculated based on where the seller or buyer is located).
It ain’t all that simple.
Luckily, just like ecommerce platforms have made it easier for folks to build businesses and sell online, you can use solutions like TaxJar to automate your sales tax compliance — making what has the potential to become a massive time suck for you into a relatively simple process. TaxJar has integrations into major ecommerce platforms like Magento, BigCommerce, Shopify and more. And working with an agency like Above the Fray makes it easier than ever to create outstanding ecommerce sites that will resonate with prospects. So you can focus on doing what you do best — making great products, and connecting with customers.