Do you charge sales tax on the products in your online shop? Do you know how to report your sales tax to the proper state? If the answer to these questions is “no”, don’t worry—you’re not alone.
Until recently, the regulations on sales tax for online businesses were sparse and rarely enforced. In 2018, the U.S. Supreme Court overturned a precedent which protected online shops from sales tax regulation, leaving the door open for each state to enforce sales tax laws on online businesses as they see fit.
What does that mean for you? It’s time to take a look at how you charge sales tax in your online store and which states’ laws apply to your business.
Sales Tax Basics
For brick-and-mortar retailers, sales tax is charged on physical goods and remitted to the state annually based on laws and tax rates set by state, county, and local governments.
For online businesses, sales tax laws have previously only been enforced in the state where the business has a physical location or office, or where the business owner lives. This means that online businesses have historically only needed to pay the government for the appropriate tax on purchases made by customers who reside in the same state as the business is located.
As of June 2018, sales tax will need to be charged and remitted for any state where the business has “economic nexus” based on criteria set by each state.
Determining Sales Tax Nexus
Nexus simply means an obligation to remit sales tax in any given state. You can have nexus in a state because you have a physical location there (physical nexus), but now you can also have nexus in a state based on the amount of sales you have in that state in any given year (economic nexus). Essentially, for most states, if you reach a certain threshold in sales to customers of a state, you will need to pay the state what you owe in sales tax on those sales.
This is a new concept for online businesses. Some states were prepared for this ruling with a set threshold for economic nexus, others quickly created one, and still others don’t have sales tax at all.
As an online store owner, you must determine whether you have nexus in each state based on your sales. You can see a full list of what qualifies you to have nexus in each state here.
Sales Tax Calculations Made Easy
Determining how much tax you must collect based on states and where you have nexus can seem daunting, but it doesn’t have to be. If your online shop is setup on WordPress with WooCommerce, you can easily utilize a plugin called TaxJar to help you automatically calculate the correct sales tax to charge on your products.
Follow these steps to bring your online shop up to speed with new sales tax laws:
- Find out where you have sales tax nexus.
- Physical nexus: You may have physical nexus in a state if you are located there, your business has any physical locations there, you have employees there, or you attend trade shows/craft fairs there.
- Economic nexus: This is the new aspect of nexus. We recommend utilizing TaxJar’s Sales and Transactions Checker to automatically determine where your sales meet a state’s threshold for economic nexus.
- Register for a sales tax permit in each state where you have nexus. This is important because many states consider it illegal to collect sales tax without a permit! TaxJar has a helpful guide to determine how to register for the appropriate permit based on state.
- Begin collecting sales tax in your store. You can do this manually following these instructions from WooCommerce or automatically with the TaxJar plugin.
- Report and file your sales tax with each applicable state utilizing the instructions provided when you received your sales tax permit. We highly recommend working with a professional accountant to determine where and how you need to file taxes for your business so you can focus on your genius work!
- A guide to sales tax for WooCommerce
- An explanation of the Supreme Court decision in South Dakota v. Wayfair
- Detailed sales tax guides by state
Questions about your online shop? We’re happy to help.