Ecommerce sales tax works based on different laws put in place by the states that impose sales tax. These laws generally say that if you hold inventory in the state and/or reach a certain sales threshold then you are liable to collect and remit sales tax in that state.
What is Sales Tax?
This is the first question people ask when figuring out ecommerce sales tax! Simply put, sales tax is a tax on items sold and collected from the customer. It is administered by the states and rules vary from state to state as to what is taxable, the amount to collect, and when to remit it to the state. Most goods are taxable as well as some services.
State revenue department websites are an excellent source of information to learn the answers to these questions. That is, if you are comfortable with reading through tax laws. Alternatively, give us a call or send us a message! We’ll be happy to answer your questions.
Do I Have to Collect Sales Tax Online?
Generally, ecommerce businesses are required to collect sales tax. However, it depends on a few factors, such as:
- Type of goods sold / services offered
- Location of warehouse(s) holding inventory
- Number of transactions into the state
- Sales volume into the state
Wherever you ship from, you are always required to register and collect sales tax from customers who live in your home state. Having a nexus review completed will help determine when you should collect.
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Do I Have to Collect Sales Tax if I Use Shopify or Other Platforms?
Ecommerce sales tax becomes a bit tricky depending on the platform you are using. If the platform is considered a marketplace facilitator, then in most states the platform will collect and remit the tax. A marketplace facilitator is a platform like Amazon FBA where you post the item for sale on their website, they collect the money from the sale, store and ship the item sold.
Since a Shopify website doesn’t do this, you will likely have to register and collect if you have items stored in the state or if you meet thresholds set up by the state. For more information, see our blog post on Nexus.
How Does My System Charge Sales Tax for Online Sales?
For ecommerce sales tax, the credit card processing merchant will add this amount to the total at check-out. Depending on the platform you use, this may automatically be set-up. For example, Amazon FBA will collect automatically in most states. But in some states, you’ll have to set it up yourself.
Across all platforms, though, the set-up process for ecommerce sales tax is usually easy. Generally, there will be a location in your account dashboard that deals with sales tax. You’ll likely check a box for each state to turn on for the platform to begin collection. We provide assistance with the sales tax collection set-up with our sales tax registration service.
Caution: Some platforms – especially smaller or not well-known apps – may not be set up to collect sales tax. You may need to figure out a work around.
How Do I Determine What Rate to Use for Online Sales Tax?
Determining the rate for ecommerce sales tax is usually easy. Again, most credit card merchants will add the correct amount usually based on the address the order is being delivered to, or at minimum the zip code. These credit card processors use up-to-date rate tables. So, if there is a good address, the correct rate will be used.
Some platforms may require you to enter the tax rate to be used for ecommerce sales tax. This may prove to be more difficult as there are hundreds of different tax rates, and thousands of jurisdictions. There may be resources available for these but may be cost prohibitive.
Generally, when a rate is needed, we recommend either using an average of the state’s rate or using the highest rate in the state. While this may mean that some customers are charged more, and others are charged less, the idea is to collect closest to the correct amount.