Sales tax can be the most complicated accounting challenge for ecommerce sellers. Soon after an ecommerce seller makes their first sale, the questions arise. "Do I need to charge sales tax?" "What items should I charge sales tax on?" "Where do I send all this sales tax I've just collected, anyway?" And inevitably, "Uh oh, did I just screw this up?" To slay the sales tax dragon once and for all, ecommerce sellers have to overcome a few challenges. The first is establishing, "nexus."
Nexus is basically a legalese way of saying, "physical presence." If your ecommerce store has a physical presence such as an office, store, or employee in a state, then you are considered to have nexus in that state. Moreover, you must charge sales tax on purchases made in any state where you have nexus, provided that the state is not one of the five states that does not require sales tax.
Nexus is important because a state cannot impose its sales tax laws on a business without nexus. Unfortunately, the laws are different for each state. Facing budget shortfalls, many state legislatures are doing their best to expand the definition of nexus to pull in more eCommerce sales tax revenue. That is what is happening with the so called Amazon Tax Laws that seek to claim nexus with a business because of a relationship with marketing affiliates in the state.
The next challenge is determining your sales tax rate. Once you've established where your nexus lies, it's time to figure out just how much sales tax you have to charge. The laws are different from state to state, from county to county in some instances, and even can vary based on specific parts of incorporated cities. Most states charge five to seven percent sales tax on purchases of physical goods, but unfortunately you do not just live and work in a state. You also probably work in a county, city, municipality, parish or other political entity that wants its cut of the sales tax pie. Certain states have a gross receipts tax, which just means the business pays a tax rate based on the gross revenue generated from sales into that state. Other states treat sales tax as an add-on, which is added to the price of an item sold.
Once you've figured out the sales tax rate for your area of nexus, you are set. You only have to charge sales tax based on where YOU are located. That is, unless you live in a state like Washington, which requires you to charge sales tax based on where the buyer is located. This means that with every new in-state order, you have to figure out just exactly how much state and local sales tax you have to charge based on your buyer's zip code. Fortunately there are tools such as Outright.com, which can help you keep track of sales of items that are subject to sales tax, and help you to know how much sales tax you have collected. The reason you have to understand the how and where of sales taxes is so you can effectively set up a good accounting system to track individual sales. You may want to track each individual sale and categorize the sale as taxable or nontaxable, so you can run a report at the end of each month to know how much revenue you generated that is subject to sales tax.
The final step is to remit the sales tax you collect. Of course, that money doesn't get to sit in your pocket after you've collected it. You were just holding it for the state. Periodically, you have to report and send in your collected sales tax to your state. Each state has different requirements when it comes to sending in sales tax. Some require you to send in sales tax quarterly, while others expect to see your sales tax remittance every month. Sometimes, this time period depends on the amount of volume you do as a seller. To find out how to remit sales tax in your state, find your state in a State Sales Tax Rates and requirements by State Guide. Or, as a last ditch effort, you can simply move to Alaska, Delaware, Montana, New Hampshire or Oregon, and forget dealing with sales tax, because these states don't have any!
Kevin Reeth is the co-founder of Outright.com. He has spent more than 15 years bringing software applications and services for Intuit, Yahoo! and eGroups. With Intuit, Kevin launched numerous small business products, including versions of Quicken, rental property software, and the JumpUp community for entrepreneurs.
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