Do You Need to Collect Sales Tax for Selling Online?

Setting up an online business requires minimal time and effort. Some platforms only require a seller profile to get started, and online retailers can quickly make extra cash. Some online sellers even replace a full-time income with an ecommerce business. 

Unfortunately, sales tax laws can be incredibly complicated. Small business owners can generate sales tax obligations in jurisdictions where they don’t live or work.

You may need to collect sales tax, depending on numerous factors. You should consider your physical location, customers’ location, and the type of product or service you sell. 

This article will help you understand whether your online store could owe sales tax in jurisdictions outside your home state. We’ll explain general principles for establishing a sales tax obligation and how you can comply with the rules. 

Keep reading to learn whether your online business could owe sales tax.

Sales Tax Nexus Explained

What Is Sales Tax Nexus?

Nexus refers to a relationship or connection between a seller and a jurisdiction. Having nexus means a taxing authority can impose tax on a business.

For example, a business located in California has nexus in the state. If the California business sells jewelry to customers in Florida, the company could also have nexus with Florida. However, determining Florida sales tax nexus requires a detailed review of multiple factors.

Sales tax laws vary by location. State, city, and local tax authorities can all impose sales taxes using different tax rates and thresholds.

Additionally, each tax type can have separate rules. For example, the above California business could establish sales tax nexus in Florida even if the company doesn’t have income tax nexus with the state. 

How Does an Online Seller Establish Sales Tax Nexus?

Although rules vary, many states follow similar nexus principles. An online retailer can generate a sales tax liability if it establishes physical presence or economic nexus.

Consider the following guidelines to determine whether you could have a state sales tax obligation in a given location.

Physical Presence

Physical presence nexus generally occurs when a business maintains workers or tangible personal property in the state. Common physical presence factors include the following: 

• Warehouse, factory, or office space

• Employees

• Inventory stored in-state

For example, consider a Texas-based business that sends items to customers in Colorado. If the Texas business has no other connection with Colorado, the company likely hasn’t established physical presence nexus in that state. In contrast, if the Texas business employs workers at a building in Oklahoma, the company has a physical presence in Oklahoma.

Some states do not consider in-state inventory as physical presence nexus. The analysis can be complicated, so we recommend partnering with business tax professionals for help with complex tax laws.

Economic Nexus

Before 2018, states generally did not impose sales taxes on online businesses unless the retailer had a physical presence in the state. 

However, a 2018 Supreme Court case, South Dakota v. Wayfair, argued whether South Dakota could impose a sales tax on an online seller (Wayfair) even though the retailer did not have a physical presence in the state. The Supreme Court approved South Dakota’s economic nexus law, which used an economic nexus threshold of 200 transactions or $100,000 in sales receipts.

After the Wayfair decision, many states adopted similar economic nexus thresholds. Most jurisdictions consider the number and/or dollar value of transactions by out-of-state sellers. 

Online sellers can establish economic nexus by exceeding a state’s sales thresholds. The company does not need to have physical operations in the state.

Economic nexus rules vary by state. For example, California, New York, and Texas impose a dollar value threshold of $500,000. California and Texas have no transaction threshold. New York imposes a 100 transaction threshold, and sellers establish economic nexus in New York after exceeding both the transaction number and dollar value thresholds.

Fortunately, online sellers with minimal sales rarely establish economic nexus in multiple states. Small businesses generally do not reach the thresholds unless they sell a high volume of products. 

What Are the Exceptions to Sales Tax Nexus?

Even if a company has physical presence or economic nexus in another state, sales tax might not apply to the company’s activities. 

Several exceptions could apply to an online business selling to customers outside its home state, such as the following:

• States with no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose state sales tax. However, city or local sales taxes may apply in some locations.

• Exempt activities and services: Most states exclude professional services, such as tax, accounting, legal, and consulting.

• Resale tax exemption: Retailers of used goods may apply for exemption certificates. 

• Exempt goods and products: Many jurisdictions exclude sales of specific items, such as groceries or prescription drugs. 

• Trade show exceptions: Some states allow exceptions for businesses that attend in-state trade shows for a limited duration.

• Drop shipping exclusion: Certain states exclude dropshipping inventory from creating nexus. Other states do not tax the seller, but they tax the drop shipper, depending on the transaction.

• Government sales: Most sales to government entities do not incur sales tax. 

• Nonprofit activities: Many states exempt nonprofit organizations from sales tax. 

Although many states exempt services, some tax sales of software, streaming services, and digital products, such as downloadable movies or ebooks. 

Determining the taxability of your internet sales can be tricky. State rules vary widely, requiring an analysis for every customer location. However, 1-800Accountant’s business tax advisory professionals can save you time on complex research and tedious calculations.

Do eCommerce Platforms and Marketplaces Handle Online Sales Tax?

Many states impose marketplace facilitator laws, which require platforms to collect sales tax for sellers. These laws apply to marketplaces such as Amazon, eBay, Etsy, and Walmart marketplace. Marketplace facilitators automatically collect sales tax on all taxable sales in states with a sales tax. 

Marketplace facilitator laws do not apply to ecommerce platforms and payment processing companies, such as Shopify, Stripe, and WooCommerce. Some platforms offer tax collection or integration tools, but sellers must often perform tax calculations. 

Even if a platform collects sales tax, the marketplace seller might still need to register for a sales tax permit. Certain states, such as Arizona, require sellers with active permits to file returns, even to report zero taxable sales or tax due.

Do I Need to Collect Sales Tax?

Determining whether you should collect sales tax requires a thorough analysis. Unfortunately, the answer is often quite complicated.

Online sellers must generally review the following factors:

• Sales tax laws in their home state

• Customer locations

• Sales tax laws in customer locations

  • Physical presence standards

  • Economic nexus thresholds

  • Taxability of products or services

  • Exemptions

• Marketplace facilitator platform collections

We recommend partnering with tax professionals to review your sales taxability. Consider outsourcing your bookkeeping to ecommerce experts who can help your online business collect sales tax.

Filing Sales Tax Returns

If your online store owes sales tax out-of-state, local rules may require your business to register and file returns. Most states follow a similar process for sales tax registration and filing.

Taxpayers generally complete the following steps:

1. Register for a sales tax permit with the state’s Department of Revenue.

2. Determine the tax liability using tax calculations, automation, or an outsourced service provider. Sales tax rates vary by jurisdiction.

3. File returns when required. Deadlines could be monthly, quarterly, or annually, depending on the amount of tax due.

4. Remit sales taxes along with the tax filing.

Many states require taxpayers to file returns and pay taxes online. Filers can use the state tax portal, sales tax software, or a third-party service provider. 

Connect with Experts in Sales Tax Compliance

Sales tax laws can be complex and nuanced, creating potential pitfalls for new and experienced business owners. 

Fortunately, sales tax professionals can support your business through taxability analysis, registration, tax return preparation, and filing. 1-800Accountant offers small business accounting, bookkeeping, and tax advisory services to help your business comply with complicated rules. Professional CPAs can help you lower your tax liability by finding tax credits, exemptions, and deductions.

Schedule a free consultation with 1-800Accountant for help with sales tax obligations for your online business.