From what I’ve seen there is still A LOT of confusion around charging sales tax in eCommerce businesses, so today I’m setting it all straight so you can make sure you’re compliant in YOUR business.
Today is going to be a quick but VERY important episode for my U.S. based eCommerce friends.
There is still A LOT of confusion when it comes to charging sales tax for eCommerce businesses — and rightfully so. Up until a couple of years ago, you were only required to charge sales tax in states where you had a physical business presence, or nexus as it’s called.
This meant if you had physical presence there, such as an office or fulfillment center, you would be required to collect and remit sales tax. But if you had no physical presence there, you didn’t have to charge sales tax at all.
As a consumer, it was pretty awesome. Purchasing a product that’s a few thousand dollars from a retailer in NY without getting charged tax equates to large financial savings.
Certain retailers, like Amazon who had fulfillment centers all over the country, were already required to collect sales tax for most, if not all states, so you wouldn’t have noticed the benefits as a consumer.
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The legal case that changed how taxes are collected
In 2018, the South Dakota vs. Wayfair case changed everything. The U.S. Supreme Court ruled in favor of South Dakota. This essentially overturned an older ruling, which meant the power was now back in the hands of the states. They can now decide if and when they will mandate sales tax be collected and paid to them or not.
When you think about it, it makes perfect sense. And I’m honestly shocked that it took so long for something like this to happen. I’m sure states were losing out on a lot of revenue as consumer behavior continues to move online. It was only a matter of time.
Every state has its own sales tax requirements
So what was the next step? Well, states had to create their own mandates and requirements… and they did. Many of them very quickly, others not so much. The real kicker is that every state has different requirements. Some are based on the total revenue, others are based on the number of transactions.
Depending on your business, it’s possible there are only a handful of states where you are required to start collecting sales tax. In certain states, like Kansas, there is no threshold, which means you’re required to collect sales tax for orders shipped to Kansas from day 1.
And it’s possible you live in a state that has no sales tax, so maybe you’ve never even thought about it. But if you’re shipping to states where you meet the threshold, you’ll still need to collect taxes on the orders that ship to other states.
What’s even MORE confusing is that some states only charge tax on the subtotal of the item, where other states (like Kentucky) charge tax on the shipping fees too.
And New York charges different sales tax based on the price of individual items.
It’s so confusing!
Keep track of sales tax with an app
So, how the fuck are you supossed to keep track of all this?
Good news, my friend… there’s an app for that!
Essentially, what the apps do is monitor your sales to each state and alert you when it’s time to start collecting the taxes. They can even help you register for a resellers permit in those states once you meet the threshold. They will also remit the taxes for you as well so you don’t have to worry about it.
In full transparency I am an affiliate of Tax Jar, and if you choose to use them would be so grateful if you’d use my link. Small commissions like that help me continue to bring you kick-ass free content to help you run your eCommerce business.
They both work with multiple eCommerce platforms but Avalara only works with Shopify Plus. So if you’re on any of the lower Shopify plans, you’ll want to use Tax Jar.
Their pricing structures differ a bit, with Tax Jar being a more standard pricing structure based on the features you want, with a 30-day free trial. Avalara is based on your sales volume so you have to contact them for rates.
Do you really have to collect sales tax?
Now you might be asking yourself, do I really have to collect sales tax? How will they know?
Good question! And I certainly don’t have the answer. But there are some hefty fines out there for not complying, so I wouldn’t recommend ignoring it.
Please note: I am not an accountant, or tax professional. Do your due diligence and find someone you can work with if you need more help with this.
Tax Jar and Avalara both have services to help you navigate this, so if you don’t already have an accountant you work with, it’s might be worth it to employ their services.
Okay friend, that’s our show for today. Stay tuned for the rest of December for more short & sweet but important episodes.
Listen to the Episode
Tax Jar (affiliate link)