Should I Collect Online Sales Tax in My Ecommerce Business?
- January 8, 2016 | Jessica Sillers
The last of the holiday cookies are eaten, and you’ve popped the champagne cork to ring in the new year. It’s time to get back to business.
In January, that means preparing your sales tax returns and payment. In almost all states, monthly, quarterly, and annual sales tax payments are due in January, so chances are there’s at least one date circled on your calendar.
If you’ve recently started selling merchandise online, you may be wondering how ecommerce will affect how you pay sales tax. Maintaining a business online can make sales tax a little more complicated, since you’ve got a much wider reach than a brick-and-mortar store.
It all starts with determining your nexus.
What Is Nexus?
At Avalara, we spend a lot of time thinking about nexus. Simply put, nexus is a physical presence in a state that’s significant enough to require business owners to remit sales tax. It gets complicated because business owners do more than open a storefront and wait for customers to arrive. You go to trade shows, hire employees in different states, and store goods in warehouses across the country. Any of these actions can be enough to create nexus in a state.
To determine where you have nexus, start by asking yourself some questions about where your offices are and where you store, assemble, and ship your merchandise. Some states are stricter than others about the minimum presence needed to create nexus, so check individual state regulations if you’re unsure.
You’ll need a sales tax permit for the states where you have nexus. If you’re missing any permits, apply right away to avoid penalties.
How Is Nexus Different for Online Sellers?
Ecommerce business owners need to be especially mindful of their nexus. You might not have a physical storefront at all, but instead store all inventory in various third-party warehouses to keep shipping times down. You may also run into online-only forms of nexus, such as click-through nexus if you use an affiliate program.
If you sell through Amazon’s FBA program, it’s smart to keep track of which states have Amazon Fulfillment Centers. If your inventory is in an Amazon warehouse, you’re probably responsible for paying sales tax on sales in that state. You can refer to our guide to check which Amazon Fulfillment Centers store your inventory.
What’s My Next Step?
Once you know where you have nexus, you’ll need to track sales and remit the appropriate sales tax for each state. There are thousands of sales tax jurisdictions in the country, so we recommend using software (like Avalara TrustFile) to help you apply the right sales tax rate to each purchase.
Make sure to configure every online selling platform you use to collect the appropriate sales tax. Shopify users should go into Settings>Taxes. Amazon sellers can set up tax collection under Settings>Tax Settings>Set Up Your Tax Collection Settings. For WooCommerce, go to Settings>Tax and check the box to enable taxes.
Next, review filing deadlines. Depending on how much your business makes, you’ll file monthly, quarterly, or annually. Each state sets its own filing deadlines and thresholds for filing frequency. We’ve compiled January deadlines for each state, so you’ve got a quick guide to start filling out your calendar.
Ecommerce can make collecting sales tax more complicated, but staying organized will help keep you in the clear. As your business grows in 2016, keep an eye out for developments that can create nexus in a new state. Be timely with your payments, and some states will even let you claim a sales tax discount. Your tax professional can help you build a strategy for a tax-compliant and profitable new year.