Collecting and remitting sales tax is an important part of any business offering goods. Here's our helpful guide on how to handle out of state sales taxes while working in e-commerce.
Can sales tax be different in different states?
November 19, 2021
As an e-commerce or Amazon seller, one of the most concerning topics is that of taxes. Taxes are a burden for everyone, but they are much harder to understand when you’re dealing with things on the business end of things. Here’s how to make sure you’re collecting the right taxes from the right states.
Make Sure You Pay Your Own State Taxes
First of all, you’re going to need to make sure you collect and pay sales tax from the state in which you operate. For a long time, this was really the only way to determine whether or not you should have a taxable relationship with a given state - if you had a physical presence within that location.
You collect these taxes on orders placed within and delivered within your state. Every state has distinct regulations surrounding what this means, so check with your state before determining exactly which orders fall under their description of taxable sales.
This could include orders purchased with a shipping address in your state, orders where amazon fulfillment center inventory has been housed in your state, orders that are picked up in said state, or orders placed while the customer is in that state. Always check with your individual state & how it does use tax.
Understand Which States You Owe Sales Tax
Understanding which other states you owe sales tax to is a bit more complicated, because there are variations of rules across all 50 states. Historically, you only needed to collect sales tax in another state if you had a physical presence there (physical nexus). This could be an office, a warehouse (yes, including an Amazon fulfillment centers warehouse), an affiliate in that state, or an employee there. If any of these are true for you, you must definitely pay sales tax for remote sales to whatever states those statements ring true for regarding your business.
However, as of 2018, the standards have changed. You can now have an economic nexus (connection) with a state that mandates the collection and remission of sales taxes by your business, simply by reaching a state defined sales minimum (which can either be a numeric value or number of orders annually).
So, any state that you sell to significantly will likely expect you to collect and pay sales taxes along with fulfillment fees. Because there are so many different regulations concerning this, it’s best to check with a professional tax adviser or lawyer to ensure that you understand which states you have nexus with, and therefore which states you must pay sales tax to.
Stay On Track With Tax Rates and Local Taxes
Tax rates change constantly, as do local laws surrounding taxes or tax owed. You need to make sure you’re on top of these ever changing rates and regulations, which can typically be found on a state's website. Additionally, some localities require local sales tax as well as state. Generally, what taxes are collected is determined by the location of purchase.
The good news is, almost every e-commerce provider does the hard work for you. They automatically adjust the tax rate the account for the location of purchase, and keep these tax rates up to date. In general, your best bet is to simply leave the default rate you see on your e-commerce platform, rather than trying to manually update it on a routine basis. Work smarter, not harder.
Collecting and Remitting Taxes
Before you are able to collect tax sales , you have to register for a sales tax permit in the states where you have nexus. Every state has it’s own registration process and fee, which you can find laid out here. Once you have received this permit, you can start collecting taxes on your purchases from within those states. The good news is, this isn’t too difficult on most e-commerce platforms to set up. Especially with Amazon, where they pre-enter the tax rates for you.
Be sure to collect all sales tax in a separate business account. This money does not go towards your income and you should not consider it as such on your tax returns. Pay all sales tax on time in order to avoid fines!
The frequency at which you have to pay sales tax will differ state by state due to state's sales tax laws. For some this will be monthly, others bimonthly, some annually. You will get all this information when you receive your retail sales tax permit from that state. Make sure you pay all the taxes you are due. There are some states that will give a portion of these taxes back as a way of saying “thank you” for doing business in their state, which is a nice perk.
What About Marketplace Considerations?
Many e-commerce business owners do their business on a large marketplace, like Amazon. A marketplace is considered as such when they provide the platform, payment options, shipping assistance, and marketing options.
For most states, they hold the marketplace facilitators responsible for collecting and paying sales tax - not the third party sellers using their platforms. This isn’t the case for all states, but will likely be the case very soon. What this means is that if you’re using Amazon, they already take care of collecting and paying sales tax for you. Meaning you don’t have to worry about tax rates and the like.
However, you still have to register for a permit in each state with which you have nexus, and file sales tax with the state as per their timeline - even though you won’t be actually paying anything. Rather, you’ll be reporting that Amazon or your FBA fees has paid these taxes.
This does not apply to you if you’re only selling on your own website or you are selling in any location other than a virtual marketplace.
Dealing with e-commerce taxes is a pain, and has become far more complicated since 2018. It’s not impossible, however! Essentially, you are responsible for collecting and paying sales tax to all states with which you have a physical connection or substantial economic connection. Register for a permit, collect your taxes, and pay them on time to keep your business in good standing! And of course - using professional tax advice and legal counsel when running this aspect of your business.
Julia Grant is a copywriter specializing in e-commerce and small business, helping businesses expand their reach with copy that clearly communicates their message and converts. She is a certified translator and interpreter and prides herself on providing culturally relevant content in both English and Spanish.See more posts from this author