There are parts of running an online store that are a lot of fun, and allow you to be creative and free. And then there are some parts that aren’t so fun, but they are very necessary. You know the old saying about taxes and death… well, we can at least help you with the taxes part! We’ve reached out to our friends at TaxJar for some help in explaining eCommerce sales tax 101. Knowing when and where to collect and submit taxes can be an overwhelming subject. Luckily they have broken it down for you.
How to know where you need to collect sales tax
Sales tax can be tricky. With 46+ different sets of state laws and evolving legislation, the average merchant has a lot to keep up with when it comes to sales tax collection and filing.
Thankfully, sales tax is just a pass-through tax and doesn’t come out of your pocket. However, you still have to understand in what states you have sales tax nexus, and when you need to collect and remit sales tax.
What is nexus and how do you know when you’re required to collect taxes in each state?
Long story short, retailers must have some kind of presence in a state before that state can require that retailer to collect sales tax from buyers in that state. As a result of the 2018 Supreme Court ruling in the South Dakota v. Wayfair case, not only can a physical presence create nexus, but also an economic presence in a state.
In other words, due to the Wayfair ruling, if you pass a state’s economic threshold for total revenue or number of transactions in that state, you’re legally obligated to collect and remit sales tax to that state.
Mentioned above, the most common forms of nexus are physical and economic.
- Physical nexus is any significant physical presence or activity in that state, such as an office, warehouse or employees.
- Economic nexus is established when a business or online seller meets established economic thresholds, usually defined as revenue or number of transactions.
What are economic nexus laws?
Economic nexus laws usually read something like, “If an online seller, even though they don’t have a presence in our state, makes more than $X in sales in our state, or conducts more than X number of transactions in our state, then they are required to collect sales tax from buyers in our state.”
After the Supreme Court ruling in South Dakota v. Wayfair, states are now free to enforce these laws on businesses.
State laws on economic nexus vary. The sales thresholds vary from $10,000 to $500,000 in sales, and some states don’t have a transaction threshold at all. In other words, if you sell enough into a state, then you may be required to collect and remit sales tax.
What happens if I have sales tax nexus?
If you have nexus in a state, then you must collect sales tax from buyers in that state. You can read the most up-to-date information about each state’s economic nexus laws here.
If you think you’ll fall into this category of having “nexus” in a state, be it physical activity (like a physical office or employees), or economic nexus (revenue or transaction activity that surpasses the state’s declared economic threshold), you’ll want to look at the necessary steps to register for a sales tax permit in each state where you’ll be remitting.
Next, you should familiarize yourself with the rules for each state in which you have nexus. Some aspects of sales tax that can vary from state to state include:
- Which products and services are taxable
- How much sales tax is charged
- When and how often online sellers are required to file returns
- Dates sales tax returns are due
Understanding if your products are taxable, and how much to collect
Product tax classification is an important part of growing your business. You should be knowledgeable about how that impacts your business and how to set yourself up for success.
Taxable or not taxable?
In the U.S., most “tangible personal property” is taxable. In other words, most items like furniture, jewelry, toothbrushes, coffee mugs, etc. will be subject to sales tax. However, some items considered to be “necessities” may not be taxable in all states. Here are a few examples:
- Grocery items are not taxable in many states, though prepared food bought at a restaurant generally is
- Clothing is not taxable in some states, though luxury clothing is often taxable even in states where most clothing is considered non-taxable
Here’s a list of common item types that may not be taxable in some states:
- Grocery food
- Certain books (textbooks, religious books, etc.)
- Prescription and nonprescription medicine
- Magazines and subscriptions
- Digital products (books, music, movies, etc.)
This is not a complete list, so keep in mind that some states may exempt other types of items. For example, coins made of precious metals are exempt from sales tax in Ohio. If you sell any of these items, check with your state to determine if you should collect on your products.
If the items you are selling are not taxable, then you are not required to collect sales tax on those items.
Product classification matters.
Certain types of products can be taxed at different rates, which adds an additional layer of complexity to sales tax. Understanding and utilizing product classification determines the correct rate at which sales tax is collected and remitted — and keeps you compliant.
Ensuring that you are classifying your products correctly so you’re charging the right sales tax can be stressful and could impact you in an audit.
Often similar products are taxed differently. For example, there are different tax codes for formal dresses, prom dresses and wedding dresses. The same goes for swimwear, wetsuits, and swim goggles. And gloves are taxed differently if they have fur, versus no fur.
There are a couple ways to properly identify your products’ taxable rate:
- If you sell just a few items in a handful of states, then you can research your specific products on the state websites where you have nexus.
- If you sell many items, or have nexus in more than a couple of states, then automation with a solution like TaxJar might be right for you. TaxJar has a built-in research team to properly categorize your products, and keep up with any changes in tax law.
Paying attention to product tax classification helps you calculate sales tax more precisely. As a result, you’ll charge the right amount for the location AND the type of inventory you’re selling. Best of all, you’re officially compliant, which makes your life so much easier.
Avoiding penalties – know your sales tax due dates
Sales Tax Due Dates
When they send your sales tax permit, the state will also assign you a filing frequency and due date.
States require sellers to pay at intervals — usually monthly, quarterly, or annually — and every state is different. You’ll be assigned sales tax filing due dates when you apply for your sales tax permit at your state’s department of revenue. You can also watch the TaxJar blog for updates on due dates by states.
Due dates will fall on a different day of the month depending on the state. In most states, sales tax is due by the 20th day of the month following the taxable period. For example, the monthly taxable period in Colorado is January 1-January 31st. Your Colorado monthly return for January would be due by February 20th.
However, states reserve the right to set their own due date. Sometimes sales tax is due on the 15th of the month, the last day of the month, the 25th of the month or even on some other date. High volume sellers may also be assigned a different filing due date.
You can see each state’s general filing frequency in TaxJar’s state guides. (States reserve the right to change this, so always file and pay based on the due date the state assigns you.) In general, the more sales tax a seller collects in a state, the more often the state wants the seller to file a return.
Bonus tip: Some sellers have had success asking the state to allow them to file less often. You can try this yourself by calling the state’s taxing authority. Find the best phone number to contact each state’s sales tax department. To avoid long hold times, we recommend calling in non-quarterly months.
Sales Tax Holidays
Every year various states offer sales tax holidays and/or tax-free weekends, which delight shoppers and store owners, but can pose a challenge when it comes to tax collection.
One thing to note, not all states hold sales tax holidays. Some are annual and are legally mandated to recur annually n, while others that are non-annual require legislation each year. Be sure to check back every year, find your state and mark your calendars for tax free shopping (and selling)!
A few examples of sales tax holidays in 2020 include:
- Back-to-school. Many states have holidays for this season, making school supplies, and clothing up to a certain amount, tax-free.
- Emergency Preparedness. Some states prone to natural disasters, like Virginia and Texas, have tax holidays covering items like generators and emergency ladders.
You can read more about the sales tax holidays in 2020 on the TaxJar blog.
Ask us about scheduling a free TaxJar demo to learn more about automating your sales tax management, from calculations to filing with the states.
Please note: This blog is for informational purposes only. Be advised that rules and laws are subject to change at any time.