Learn

Language:

What Is eCommerce Tax? A Beginner’s Guide

By Alison K Plaut

Published on 31 Jan 2024 5 min read

With eCommerce sites booming globally, building an eCommerce business offers opportunities to market to a wide audience while establishing your brand. If you’re already selling products online, you may have customers all over the country or all over the world. That’s great for your business, but can make calculating and collecting sales tax complex. 

If you sell online, you’re effectively selling in 50 states, which means you’ll need to meet 50 unique sales tax laws, plus local sales tax laws. Read on to learn how to navigate eCommerce tax effectively. 

Understanding eCommerce Taxes

E-commerce taxes are sales taxes imposed on goods sold online or through e-commerce sites. Each state sets its own sales tax rules, and many local governments charge additional sales tax. Sales taxes are collected and remitted by the seller. 

In the case of eCommerce, if the seller doesn’t collect sales taxes, the consumer may be required to pay sales taxes directly. For example, if you purchase furniture online from a state with no sales tax but live in Illinois, you’ll be responsible for the difference in taxes through use taxes.

Businesses must pay use taxes on their untaxed purchases when filing sales and use tax returns. Consumers must report untaxed sales and pay use taxes with annual state tax returns.

Five states don’t have any sales tax:

• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

In addition, some states have lower tax rates on specific commodities or items exempt from sales tax. For example, Illinois has a 6.25% sales tax, but grocery items have a reduced 1% sales tax. For that reason, eCommerce tax calculations become complex.

Whether you need to collect sales tax on interstate product or service sales depends on specific state laws and the economic nexus between the seller and the consumer that may trigger a tax obligation. Fortunately, there is excellent sales software available to help you determine economic nexus for your company. 

How to Determine Which Taxes to Collect?

The taxes to be collected depend on the customer’s location and the specific tax laws in that jurisdiction. It used to be that if the business had a warehouse or physical store in the state, it had to levy sales tax, but that is no longer the only criterion.

Most states levy taxes based on the consumer’s physical location, not the business’s. That means you must charge the appropriate sales tax for the consumer’s residence. If your business is in New York, and the consumer is in Iowa, you’ll charge Iowa’s sales tax rate. But there are exceptions. Therefore, for most eCommerce businesses the best option is to use software or consult with tax professionals to determine the correct taxes to collect. 

How to Collect eCommerce Tax?

The requirement to collect taxes in different states depends on various factors, including the business’s sales volume and the state’s economic nexus laws. Businesses should consult with tax experts to understand their specific obligations.

There are various eCommerce sales software solutions that allow you to seamlessly integrate tax software and automatically charge applicable taxes. For example, major eCommerce platforms allow you to integrate TaxJar or TaxCloud into your online store to easily charge the appropriate tax.  

What Is Economic Nexus?

One of the major factors that states use to determine whether an eCommerce vendor must charge sales tax is the economic nexus between the business and the state. Economic nexus or tax nexus refers to the degree of connection between a business and a state. Based on state-specified thresholds, economic nexus can trigger tax obligations. Here is the state-by-state economic nexus sales tax guide. 

If your business has economic nexus in a state, you must collect sales taxes for all sales made in that state. Traditionally, retailers with a physical presence in a state, such as offices or warehouses, had a sales tax nexus, which would exempt eCommerce businesses from collecting sales tax in most states. 

However, that changed with the 2018 Supreme Court decision in South Dakota v. Wayfair. Now, states are allowed to define sales tax nexus to include e-commerce businesses with no physical presence in the state. Need more help? Get our comprehensive tax nexus guide here. 

How to Remit eCommerce Tax?

The process of remitting eCommerce taxes starts with determining your economic nexus with each state. You will need to check each state’s criteria, use software that calculates nexus automatically, or work with a tax professional.

Then, you will need to get registered in all necessary states and collect and remit taxes to be compliant. You can start with the state where your business is registered, and any other states where you have warehouses or offices.

Generally, you’ll need to register your business with each state’s revenue department to begin collecting taxes. You may also need to obtain a seller’s permit or sales tax permit, depending on state laws. 

What Are the Exceptions to eCommerce Tax?

Some states offer exemptions or thresholds for small businesses, where they may be exempt from collecting or remitting taxes if their sales volume falls below a certain threshold. These thresholds vary by state.

In most states, the sales thresholds for sales tax nexus are substantial enough not to affect small businesses. One common threshold is $100,000 in sales or 200 transactions. Massachusetts, California, Texas, and New York have a threshold of $500,000, which gives you even more flexibility. But there are a few exceptions, including Oklahoma and Kansas, with much lower thresholds. For that reason, checking each state’s laws is essential. 

Then, sales software or accounting software can help track your sales carefully to understand where you’re selling and what your volume is by state. You can find helpful charts, maps, and requirements with the National Conference of State Legislatures or the Streamlined Sales Tax Governing Board (SSTGB).

What Happens if You Don’t Collect or Remit Taxes?

Failure to collect or remit taxes as required can result in fines, penalties, and legal consequences. Businesses need to comply with tax laws to avoid potential issues from additional back taxes to high fines or, in extreme cases, incarceration.

Simplifying Taxes for eCommerce Businesses

Sales tax can seem hugely complicated when operating an eCommerce business in 50 states. Fortunately, there are software solutions to automatically calculate economic nexus, track sales thresholds, and update company collections policies.

If you want to stay 100% compliant and have worry-free tax filings, consider doola’s tax package. It will prepare and file tax forms for companies and e-commerce owners, to help you ensure compliance while you manage and grow your business. Get doola’s tax package to save time and protect your company!

FAQs