Whether you’re using Shopify, WooCommerce, another eCommerce platform or a custom CMS, it’s important to keep up with the latest sales tax regulations. Even small businesses can face significant penalties for accidental non-compliance.
This guide will help you understand the key sales tax laws in the eCommerce space. Figure out your sales tax obligations straight away and enjoy running your business!
1. You must pay tax in each state where you have nexus
Nexus is a critical concept for all eCommerce businesses. It refers to the connection between your business and a state that requires you to collect sales tax on sales made there.
You can have physical or economic nexus in a state. The idea of physical nexus has been around longer and refers to your business’s physical presence in the state.
Factors that establish physical nexus:
- You have a physical store, warehouse or office in the state
- The business has a postal address in the state
- You have an employee living there, temporarily or permanently
- You or an employee has attended certain events or trade shows there on behalf of the business
Key Takeaway
You must determine if your business has physical nexus in any state. Many eCommerce businesses assume they won’t meet the physical nexus requirements and get caught out. Speak to a tax professional if you’re unsure!
2. Economic nexus thresholds apply – but not all states are the same
Following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., many states enacted economic nexus laws. Even if you don’t have a physical presence in the state, you must collect sales tax if your sales exceed a certain threshold.
Each state sets its own economic nexus threshold. For many, it’s either $100,000 in revenue or 200 transactions, but states including California and Texas have a threshold of $500,000. Make sure you check the requirements of each state where you have customers. You could establish nexus by selling just 200 products, even if your revenue from that state is less than six digits.
Key Takeaway
Regularly review and monitor your sales data to determine if you surpass economic nexus thresholds in each state. Or save yourself some time and set up automated nexus monitoring! Learn more about nexus
3. Marketplace facilitator sales tax laws may remove some pressures – but you’re not off the hook
Many states have enacted marketplace facilitator laws: the platforms themselves are responsible for collecting and remitting sales tax, not the individual sellers.
If you sell through Amazon or Etsy, for example, the platform may be collecting sales tax for sales made to customers in certain states. Double-check whether the platforms you use count as marketplace facilitators in the states where you operate. Then, check what’s required of your business.
If the platform you sell through is a marketplace facilitator, this doesn't necessarily absolve you from all tax-related responsibilities. Sorry to burst your bubble! You may still need to file sales tax returns and should always keep detailed records.
Key Takeaway
Verify if the platforms you use are marketplace facilitators, check the rules in specific states and determine what the platform will handle and what you need to manage.
4. You may owe sales tax to multiple jurisdictions within different states
Each state has its own sales tax rate, rules, and filing requirements. Then within each state, you may be responsible for collecting local sales taxes. If you sell to customers in multiple states, it all gets pretty complicated.
That’s where automated sales tax software comes in. Many eCommerce platforms offer integrations with tax compliance solutions like our own Yonda Tax, so you can automate tax calculations and filings for every state and district.
Key Takeaway
Invest in reliable sales tax software or services to manage multi-jurisdictional tax compliance efficiently.
Explore our eCommerce sales tax services →
5. You must collect resale certificates for exempt sales
If you sell products to other businesses as a supplier, and they will be collecting sales tax when reselling the items, the transaction will likely not be taxable. To claim these exemptions, you need to collect and store valid resale certificates from your customers.
Resale certificates are issued by state tax authorities and allow buyers to purchase goods tax-free if they intend to resell them. It's important to verify these certificates and keep accurate records to justify your exempt sales during audits.
Key Takeaway
Ensure you understand the exemption rules in each state you operate in and maintain meticulous records of all resale certificates and exempt sales.
6. If you use a drop shipping model, you still have sales tax obligations
In drop shipping, a retailer (you) sells a product, but the supplier or manufacturer (the drop shipper) ships the product directly to the customer.
Retailer and Drop Shipper in the Same State
If both the retailer and the drop shipper are in the same state and the customer is also in that state, the retailer is responsible for collecting sales tax.
Retailer in State A, Drop Shipper in State B, Customer in State C
This is more complicated and can vary by state. Generally, the following applies:
- Retailer's Responsibility: If the retailer has nexus in the customer’s state (State C), the retailer must collect sales tax from the customer.
- Drop Shipper's Responsibility: The drop shipper may need to collect sales tax from the retailer if the retailer does not provide a resale certificate and the drop shipper has nexus in the customer’s state (State C).
Key Takeaway
Check each state’s rules for drop shipping and collect the correct tax based on your nexus status, the location of the drop shipper, and the item’s destination.
6. Don’t charge customers taxes on sales tax holidays
A sales tax holiday is a temporary period during which certain items are exempt from state sales tax. These holidays are often intended to encourage consumer spending on specific categories like back-to-school supplies, energy-efficient products, or disaster preparedness items.
As an eCommerce business, it’s your responsibility to make sure you don’t collect sales tax on eligible items within these states during the tax holiday. This is easy to do with good sales tax software. You’ll also want to make the discount known to customers in that state to incentivize them to buy!
Key Takeaway
Keep track of sales tax holidays or set up your systems to disclude taxes automatically.
Conclusion
Take the following steps to manage your sales tax obligations effectively:
- Monitor your nexus status in each state
- Keep track of economic thresholds
- Understand marketplace facilitator laws
- Stay compliant across multiple jurisdictions
- Handle exemptions properly
- Stay informed of seasonal tax holidays
- Use an automated sales tax solution
- Consult a tax expert
Your CMS or eCommerce platform may offer tools and integrations to assist in this process, but the ultimate responsibility lies with you. Stay proactive, informed, and compliant to safeguard your business from potential pitfalls.
Need help staying compliant with changing eCommerce tax rules? Get in touch and chat with one of our experts!