How do I handle sales tax collection for items sold online?

Businesses are well aware of sales tax. In every state but Alaska, Montana, Oregon, Delaware and New Hampshire, companies have had to deal with it since they opened up their doors for operation.

Now, you are considering the move to an online store in order to expand your potential audience. Or perhaps you’re a startup looking to sell a good or service online yet do not know how sales tax relates to online transactions?

Understanding how sales tax applies to online orders is slightly complicated, yet navigable. There are a few general rules and steps you need to take, then it’s simply a matter of finding out the exact laws of the state.

When must you collect sales tax online?

There are only a handful of states in the country that do not impose a state sales tax. Furthermore, many of the states with a tax also give local districts the right to enforce additional sales tax so they also get a chunk from the pie.

  • If your business has a physical presence, also known as a nexus, then you must collect applicable sales tax from online customers provided the state is not part of NOMAD (New Hampshire, Oregon, Montana, Alaska, Delaware).
  • If your business does not have a physical presence than you generally are not obligated to collect sales tax for online transactions.

However, that could all change soon. In June 2018, the U.S. Supreme Court ruled that the exemption of not having a physical presence may not exclude your company from collecting sales tax any longer. It will take another year or two to find out exactly how the Supreme Court ruling will alter the tax collection landscape.

Defining a Physical Presence

As you can see, sales tax that is collected from items sold online has to do with whether you have a “physical presence” or not. What exactly does that mean when you are moving goods or services through the Internet?

A physical presence is defined as having some type of facility within the state’s boundaries. It may include:

  • A storefront
  • An office
  • A warehouse

Understanding Your Nexus

It is important to keep in mind that your nexus only applies to where your physical presence is located. So, for example, if you make a sale to a buyer in North Carolina, you thankfully do not need to calculate the applicable sales tax from the state of North Carolina. You only need to calculate the sales tax from the state where your storefront, office or warehouse is located.

However, that all changes if your orders are FBA (Fulfillment by Amazon). In these instances, you are not shipping the product directly from your physical presence to the customer (because it goes through a fulfillment center), therefore creating what tax professionals call “connections”.

Connections may require you to also collect sales tax from customers in other areas where Amazon does business, which makes the calculations far more complicated.

Therefore, the first step in the procedure is A) finding out if you have a physical presence or not, and B) if that nexus enforces a state sales tax.

NOTE: States enforce the connection between a nexus and online sale differently. There are eligibility factors to consider so it is always wise to consult an expert for tax help if you are unsure about the process.

Factors in Sales Tax Collection

Each state has its own rules for how they govern sales tax. Furthermore, you may also have to deal with local formalities. There are a few factors that determine what you need to collect:

  • Which products and services are taxable?
  • How much of a percentage is charged for sales tax?
  • When and how often online merchants need to file sales tax returns?

Steps in Collection

Unfortunately, every tax season online merchants spend hours dealing with tax compliance. It is not always easy to get sales tax right, and is extraordinarily time consuming.

There are a few steps necessary for compliance regarding online orders:

  1. Determine where your nexus is located.
  2. Verify that the products you are selling are subject to sales tax of the nexus.
  3. Register for a sales tax permit in the state where the nexus exists.
  4. Amazon and other popular online merchants can help establish sales tax collection through the online carts at the checkout process.
  5. Report the sales tax to the appropriate authorities.
  6. File the sales tax returns by the state or local deadlines.

Tax Help From the Professionals

Do you feel daunted by the thought of collecting sales tax, let alone reporting and filing it? Unfortunately, online sellers are often subjected to the same rules as a brick-and-mortar shops, and it gets even more convoluted if you build “connections” through FBA orders.

Contact a tax professional like Levy Tax & Associates to help you through the process and make filing taxes with an online business much easier. Give us a call at 800-TAX-LEVY or visit our website.

Contact Levy & Associates for Dependable Tax Audit Services

Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.

There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.

Related Tax Audit Blog Posts

Do Tax Liens Expire?

Read More

Will The IRS Take My Refund for Child Support?

Read More

What’s the Difference Between a Tax Lien and a Tax Levy?

Read More