Chapter 1 The Complete Sales Tax Guide for Online Sellers [Nexus by State Included]
Let’s start with the basics of ecommerce taxes.
Ecommerce tax refers to the sales tax associated with an online sale. Sales tax is a small percentage of a sale tacked on to that sale by an online retailer.
Sales tax is a “consumption tax,” meaning that consumers only pay sales tax on taxable that items they buy at retail.
45 U.S. states and Washington D.C. all have a sales tax.
On top of this, most of those states allow local areas such as cities, counties and other “special taxing districts” to have a sales tax.
That’s why you may see local areas, such as Rhinebeck, New York, that have an odd amount of combined sales tax.
Here are all the components of the Rhinebeck, NY sales tax rate:
Sales tax is governed at the state level. There is no “national” sales tax law in the U.S.
Because of this, online sellers may find themselves dealing with quite different sales tax laws and rules when dealing with sales tax in the different U.S. states.
Do You Have to Charge Sales Tax for Online Sales?
As an online retailer, if you are responsible for sales tax in the state, it is your responsibility to charge your buyers the correct amount of sale tax and remit the taxes collected back to the state.
Let’s look at when and from which customers online sellers need to collect an internet sales tax.
The basic rule for online sellers when collecting sales tax is:
- Your business has sales tax nexus in the same state as your customer.
- The product is taxable in that state.
Let’s explore these concepts a bit more in-depth.
Sales Tax Nexus
Sales tax nexus is just a fancy legalese way to say “significant connection” to a state.
If you, as an online retailer, have nexus in a state, then that state considers you on the hook for charging sales tax to buyers in the state.
You’ll always have sales tax nexus in your home state. However, certain business activities create sales tax nexus in other states, too.
Ways to Have Sales Tax Nexus in Different States
- A location: an office, warehouse, store, or other physical presence of business.
- Personnel: an employee, contractor, salesperson, installer or other person doing work for your business.
- Inventory: Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel.
- Affiliates: Someone who advertises your products in exchange for a cut of the profits creates nexus in many states.
- A drop shipping relationship: If you have a 3rd party ship to your buyers, this may create nexus.
- Selling products at a trade show or other event: Some states consider you to have nexus even if you only sell there temporarily.
What Conditions Create Sales Tax Nexus in Every State
Most definitions of nexus include the terms “doing business” or “engaged in business.”
Nexus Requirements By State:
- Alabama – Alabama code section 40-23-68 details what creates sales tax nexus in Alabama.
- Arizona – Arizona’s Nexus in Arizona guide details what creates sales tax nexus in Arizona.
- Arkansas – The Arkansas Department of Finance and Administration’s “Arkansas Rules” publication from 2008 details nexus on page 1, under “F. Doing Business As.”
- California – Section 6203 of the California Revenue and Tax Code talks about what creates sales tax nexus in California.
- Colorado – Regulation 39- 26-102.3 from the Colorado Department of Revenue goes into what creates sales tax nexus in the state.
- Connecticut – General Statutes of Connecticut, Title 12 Taxation, Chapter 219, section 12-407(a)(15)(A) details what constitutes sales tax nexus. (You can find it easily in this long page of text by searching the exact term “Engaged in business in the state”.
- Florida – Florida calls sellers with nexus “dealers,” and defines “dealer” in the Florida code section 212.06.
- Georgia – Georgia calls sellers with nexus “dealers,” and defines dealer in Georgia code title 48, section 48-8-2(3).
- Hawaii – Hawaii doesn’t have sales tax, but does have a “general excise tax.” Most states with any kind of presence in Hawaii, including providing services, will likely be subject to the general excise tax. Hawaii defines doing business in their General Excise Tax law, chapter 237-2 (Starts on p. 4 of this link).
- Idaho – Idaho considers “retailers engaged in business” in Idaho to have sales tax nexus. Here’s how Idaho defines sales tax nexus.
- Illinois – Illinois considers “retailers” in the state to have sales tax nexus. Here’s how Illinois defines “retailers,” (Page 2) and here (search “Retailer maintaining a place of business in this State”).
- Indiana – Indiana considers “retailers” to have nexus in Indiana. Here’s how Indiana defines retailers with nexus: Indiana Code 6-2.5-3-1(c) (you may have to choose “Chapter 6: Taxation” then use the search bar within the code).
- Iowa – Iowa defines retailers with sales tax nexus in Code of Iowa Section 423-1(43).
- Kansas – Kansas statute 79-3702(h)(1) defines what business activities are considered to create sales tax nexus in Kansas.
- Kentucky – Retail activities that create nexus in Kentucky are described in Kentucky statute 139.340(2).
- Louisiana – Louisiana considers entities “Engaging in business in a taxing jurisdiction” to have nexus. This definition can be found in Louisiana Code Sec. 47:301(4).
- Maine – You can find what constitutes sales tax nexus in Maine in their “Sales Tax Reference Guide.”
- Maryland – Maryland defines what is considered nexus for out-of-state vendors in their General Sales Tax Article here.
- Massachusetts – You can find out what constitutes nexus on this page under the heading “Who is a sales/use tax vendor?”
- Michigan – Find out what Michigan has to say about sales tax nexus here. Also note that Michigan updated their definition of nexus as of October 1, 2015.
- Minnesota – Minnesota defines sales tax nexus in Minnesota Statute 297A.66.
- Mississippi – Find out what constitutes doing business/sales tax nexus in Mississippi in Mississippi Code Ann. 27-65-9.
- Missouri – Find out what constitutes sales tax nexus in Missouri in the Missouri Revised Statutes here.
- Nebraska – Nebraska Revised Statute 77-2701.13 defines what business activities create sales tax nexus in Nebraska.
- Nevada – Nevada defines what creates sales tax nexus in the state in a Sales Tax FAQ. Interestingly, Nevada repealed their definition of “retailer maintaining a place of business” in the state in 2007 and have not replaced it. They have, however, provided guidance for out-of-state sellers in the Use Tax – Common Questions and Answers (opens in word doc!) document on their Department of Taxation Website.
- New Jersey – New Jersey Statute 52:32B-2 defines what is considered a “seller” under New Jersey law, and New Jersey Technical Bulletin 78-R goes into more detail about what activities create sales tax nexus in New Jersey (p. 2).
- New Mexico – New Mexico has a “gross receipts tax” rather than a sales tax. You can most easily find out more about who has to collect and remit gross receipts tax here.
- New York – New York defines “vendors” as having sales tax nexus. You can find the definition of “vendor” in New York Code Section 1101(B)(8).
- North Carolina – You can find North Carolina’s definition of “engaged in business” (which creates sales tax nexus) here (p. 4 under “Engaged in Business.”)
- North Dakota – In North Dakota, any “Retailer maintaining a place of business in this state” has nexus. You can find that definition here (p. 2).
- Ohio – Ohio discusses what constitutes nexus for out-of-state sellers here (Section (8) “Nexus with the State”).
- Oklahoma – You can click here to read exactly what the Oklahoma Department of Revenue (Oklahoma’s taxing authority) has to say about what constitutes sales tax nexus in Oklahoma (page 8 – “Place of Business.”)
- Pennsylvania – Pennsylvania considers sellers “having or maintaining a place of business” in the state to have nexus. Here’s what Pennsylvania code has to say about what defines “having or maintaining a place of business.”
- Rhode Island – See p.2 of this document for what constitutes “engaging in business in the state” of Rhode Island.
- South Carolina – South Carolina spells out who has sales tax nexus in the state on this page under “Who is required to file a sales and use tax return?”
- South Dakota – Any “retailer maintaining a place of business in the state” has sales tax nexus in South Dakota. See their definition here (10-46-1(12).)
- Tennessee – You can find Tennessee’s definition of sales tax nexus for out-of-state retailers on page 11 of this publication.
- Texas – You can find Texas’s definition of “engaged in business” in the Texas code Sec. 151.107.
- Utah – Read Publication 37 for what constitutes sales tax nexus in Utah.
- Vermont – Find out what creates sales tax nexus for out of state sellers in Vermont here (under subheading (9).)
- Virginia – Virginia considers “dealers” to have sales tax nexus. Find out how Virginia defines “dealer” here.
- Washington – This publication defines nexus in Washington state.
- Washington D.C. – Sellers “engaging in business in the District” have sales tax nexus in the District of Columbia. Find out what they mean by “engaging in business in the District” by searching for those terms here.
- West Virginia – This page defines what conditions create sales tax business in West Virginia for “retailers.”
- Wisconsin – View “activities which create Wisconsin nexus” here (11.97(3).)
- Wyoming – Wyoming considers “vendors” to have sales tax nexus. You can find Wyoming’s definition of “vendor” here under “Article 1 – State Use Tax.”
Most tangible personal property – like furniture or toothbrushes – is taxable.
But some states make exceptions for certain products.
For example, clothing is not taxable in Pennsylvania. So if you sell clothing to a customer in Pennsylvania, don’t charge them sales tax!
As another example, the state of Illinois charges sales tax at a reduced rate of 1% on grocery items.
So if you have nexus in Illinois and sell grocery items, make sure you charge that 1% sales tax rate instead of the full Illinois sales tax rate. The usual Illinois sales tax rate is 6.25% + any local rates that apply.
Each state decides which items are and are not taxable. If you think you may be selling an item that isn’t taxable, check with your state.
If you have sales tax nexus in a state, and the products you are selling are taxable in that state, then you are required to register for a sales tax permit and collect sales tax from buyers in that state.
Most items are taxable.
3 Steps to Sales Tax Compliance
Once you’ve determined that you have nexus in a state and that you’re selling taxable items in that state, your next step is to get compliant.
1. Register for a Sales Tax Permit.
Before you do anything else, get compliant by registering for a sales tax permit in your nexus state.
You do this by contacting your state’s taxing authority (usually called the “[State] Department of Revenue.”) The state will require identifying information from you and your business and information about your business activities.
You can find out how to register for a sales tax permit in every state here.
Don’t skip this step!
Most states consider it illegal to collect sales tax without a permit.
In their point of view, if you collect without a permit you are representing to your customers that you’re collecting sales tax, but pocketing the money for yourself.
Always have a valid sales tax permit before you begin collecting.
When they issue your sales tax permit, your state will also assign you a sales tax filing frequency. This is generally either monthly, quarterly or annually.
As a rule of thumb, the higher your sales volume in a state, the more often the state will want you to file a sales tax return and remit the sales tax you’ve collected.
2. Collect Sales Tax.
Next, set up and start collecting sales tax online for all of your online shopping carts and marketplaces.
Each shopping cart and marketplace will have a way for you to collect sales tax, though some sales tax collection engines are more robust than others.
For example, Amazon has a very detailed and exact sales tax collection engine.
eBay, on the other hand, only allows online sellers to collect one sales tax rate from buyers in each state.
Why is it important to be able to collect more than one sales tax rate per state? It’s because of a concept called “sales tax sourcing.”
Let’s go over the basics.
Origin & Destination-Based Sales Tax Sourcing
We already mentioned that each state is allowed to make its own sales tax rules and laws.
One choice states get to make is whether or not to use “origin-based” or “destination-based” sales tax sourcing.
This simply means that states get to decide whether online sellers charge sales tax based at the sales tax rate of their business location (origin-based sourcing), or whether online sellers are required to collect sales tax at the customer’s ship to address (destination-based sourcing.)
The majority of states are destination-based.
From the state’s point of view, this assures that every local area receives the exact amount of sales tax collected from buyers in their jurisdiction.
But it can make sales tax collection, reporting and filing very difficult for online sellers who have nexus in destination-based states.
Origin-based sales tax collection example
Lou lives in and sells online from his home in Irving, Texas. Texas is an origin-based sales tax state, so when Lou makes a sale to a buyer in Archer City, Texas he charges that customer his home rate of 8.25% in Irving.
He does not charge the customer the Archer City rate.
Destination-based sales tax collection example
Amanda lives in and sells from her home in Stamford, New York. New York is a destination-based sales tax state, so when Amanda makes a sale and ships an item to a buyer in Buffalo, she is required to charge her customer the Buffalo sales tax rate.
She does not charge the buyer her home sales tax rate in Stamford.
Didn’t Pass the 2 Question Test Above?
You can read a whole lot more about origin vs. destination-based sales tax sourcing here.
3. Report and File Sales Tax.
When they issued your sales tax permit, your state assigned you a sales tax filing frequency.
This means your sales tax due date will roll around either monthly, quarterly or annually (and sometimes semi-annually.)
Keep in mind that every state’s sales tax due dates are slightly different.
Most states want to hear from you on the 20th day of the month after the taxable period, but others want to hear from you on the last day of the month, or the 15th, or the 23rd, etc.
When your due date rolls around, your job is to report how much sales tax you’ve collected in each state.
If the state just wanted to see one number, your job would be easy.
But to complicate matters, most states want to know how much sales tax you collected from buyers in each taxing jurisdiction.
This means figuring out how much sales tax you collected in each state, city, county and other special taxing jurisdiction in all of your nexus states. (And who on earth knows which city is in which county in a state without looking it up?)
This process becomes especially painful if you sell on multiple channels, and have to attempt to integrate more than one sales tax report.
Fortunately, we live in a time where ecommerce sales tax software automation technology exists to make this process simple.
TaxJar is one sales tax automation app you can use within the BigCommerce dashboard.
THE BIGCOMMERCE BENEFIT
Basic automatic U.S. state sales tax calculation is available to all BigCommerce subscriptions and will determine sales tax rates during checkout based on a standard tax rate for states in which you are required to collect sales tax.
If you or your customers require any special exemptions, if you sell products which require an excise tax, or if you have other special requirements, you can link an Avalara AvaTax premium account to ensure you are collecting the correct sales tax by using product tax codes for each item in an order.
You can also define custom tax rules using the Manual tax settings if you do not have an Avalara AvaTax premium account.
Please contact your tax accountant for advice if you are unsure about whether your products require special tax calculation.
Once you’ve reported how much sales tax you’ve collected, your next step is to file your sales tax return and remit the sales tax you’ve collected from customers.
There are a couple of important considerations here:
- Always file “zero returns:” File a sales tax return by your due date, even if you didn’t collect any sales tax from your buyers over the taxable period. States want to hear from you even if you don’t have any sales tax to remit. Some states will even levy a penalty on you for failing to file a zero return.
- Take advantage of discounts: About half the states with a sales tax realize that asking retailers to act as tax collection agent is a burden. These states allow you to keep a very small percentage (usually 1-2%) of the sales tax you collect from buyers. Be sure to take advantage of this discount when filing in one of these states with a sales tax discount.
To be fully sales tax compliant, register for a sales tax permit in the states where you have sales tax nexus, then file and remit sales tax due by each of your sales tax due dates.
Other Important Sales Tax Facts for Online Sellers
With that, you have the basics you need to be sales tax compliant.
There are a couple of other interesting things to note about sales tax.
In most states, your sales tax permit also serves as a resale certificate or seller’s permit.
If you do retail arbitrage – buying items at retail with the intent to resell them yourself – then you are not required to pay sales tax on those items if you present your resale certificate to a participating retailer.
Now keep in mind that retailers are not obligated to accept your resale certificate.
So if you do have a valid resale certificate, but the retailer from which you are buying items to resale charges you sales tax, you are often able to reclaim the sales tax you paid on your next sales tax filing.
Also, keep in mind that resale certificates are strictly to be used to buy items you truly plan to resale. It is unlawful to use your resale certificate to buy items like office or packing supplies, or items for personal use.
The state considers this fraud and both you, as the reseller, and the retailer who sold items to you could face fines and penalties.
Periodic “Sales Tax Checkups.”
You should double-check your sales tax compliance periodically.
Business activities such as hiring an employee in another state, or opening a location in another state may mean that you now have sales tax nexus in new states.
Conversely, you may also close a location or have an employee leave your company, which means that you no longer have nexus in a state.
If your sales tax liability changes, be sure to update your sales tax permits with each state, and also to update your sales tax collection on your various shopping cart and marketplaces.
A periodic review will ensure that you are fully sales tax compliant.
For more information about internet sales tax, you can check with your state’s department of revenue or a qualified sales tax professional.
Next up: Amazon for FBA Sellers.