If you’re an online seller, you have different rules for sales tax than brick-and-mortar businesses. You hear it asked time, and time again: “do I have to collect sales tax for online sales?” Short answer: yes, most of the time. Sales tax is complicated, but it can be especially challenging for e-commerce stores. If you operate your business online, you need to know how to do sales tax on internet sales.
It’s a good idea to check with your accountant about your sales tax liability. To help you get started, we’ll show you some basic points about sales tax on internet sales.
Understanding sales tax
State and local governments enforce sales tax on certain goods and services. Sales tax is a pass-through tax. You (the seller) do not pay the sales tax. Instead, you collect the sales tax as a percentage of your customers’ total bills. Then, you remit the tax to the appropriate government organization.
Each state has a different set of rules for sales tax. Some states do not enforce sales tax. In other states, the state government does not have a sales tax, but localities within the state do. You should check with the states and localities in which you do business for your sales tax rules.
When do I collect sales tax?
“When do I collect sales tax? Do I have to collect sales tax for online sales?” These are popular questions among online sellers.
Usually, for brick-and-mortar stores, sales tax depends on your business’s location. You collect sales tax from areas you have a physical business location.
Let’s say you own a business in Ohio. Since all your business comes from Ohio, you collect at the Ohio sales tax rate on each transaction subject to sales tax. This is known as origin-based sales tax. Then, you send the sales tax to Ohio’s Department of Revenue.
Sales tax liability gets more difficult with online sales. That is because, as an e-commerce seller, your business does not have a physical location.
Online sales tax liability: Nexus
Knowing when to collect sales tax on internet sales depends on your business’s nexus. Nexus is your business’s presence. Even though you don’t have a physical store, your online business has a presence.
You have to collect sales tax in states you have nexus. Nexus rules for e-commerce businesses vary by state.
Common nexus examples
Though you don’t operate from a physical store, your business has nexus. Here are some common types of nexus:
You have nexus in the state you live in and operate your business. If you sell to a customer in the same state that you live in (and that state enforces a sales tax), you need to collect sales tax from that customer.
Warehouse, inventory, and storage facilities
Some states consider locations that you store inventory or assets as your nexus. For example, if you have a warehouse in Tennessee, you may have nexus in that state. You might need to collect sales tax from customers in Tennessee, even if that is not your business’s state.
Some states consider where your employees, contractors, and salespeople are located as your nexus. If you have an employee living in a different state than you, it’s possible you have nexus in that state too.
Do you have a third-party provider ship your company’s orders directly to your customers? If so, you might have nexus in the states these third-party providers are located.
Trade show attendance
In certain states, you have nexus if you or an employee attended a trade show in that state within the last 12 months.
When do I not collect sales tax on internet sales?
You need to check the specific rules of each state you think you may have nexus in. You should also check with an accountant before collecting sales tax.
If you do not have nexus in a state, you do not collect sales tax. For example, you operate your business in California. You sell to a customer in Nevada and you do not have nexus in that state. You do not collect sales tax from the customer in Nevada.
You also do not collect sales tax if a state does not enforce sales tax. The states that do not collect sales tax are Delaware, Montana, New Hampshire, and Oregon.
How do I collect sales tax?
To collect sales tax on internet sales, first find out states in which you have nexus. For the states that you have nexus, you need to get a sales tax permit from that state’s department of revenue.
Check the state or locality’s sales tax rate. Each state and locality collects sales tax at a different rate. Collect sales tax at the current rate for the state or locality you are collecting.
After collecting the sales tax, remit the tax to the correct government agency. For example, if you collect sales tax in Texas, you send the amount you collected to Texas’s Department of Revenue.
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This is not intended as legal advice; for more information, please click here.