State Sales Tax for E-Commerce Sellers Explained

What Is Sales Tax?

Sales tax is an additional tax added to the price of a tangible product. It is determined by each state and corresponding municipalities. This can be seen on your receipts when purchasing a product, groceries, or eating at a restaurant.

Typically, sales tax is applied to the retail price of tangible products. The majority of services are exempt from taxation but not all. This is a way for states to generate revenue.

There can be different percentages of sales tax applied to different items such as alcoholic beverages, gas, or food for example. These will be itemized on your receipt accordingly. For example, Nashville, Tennessee has a 9.25% sales tax (consisting of 7% for the state and 2.25% for the county) while the state of Georgia has a rate of 4%.

You can check with the Department of Revenue’s website for details and a breakdown of different tax rates for each state and local districts. Usually, as a consumer, we don’t pay too much attention to these things, since we want what we want, and don’t have much control over the taxes. It could make sense to do some additional research when purchasing larger items to understand the full cost.

Who Has To Pay Sales Tax? Determining Nexus When Selling Nationally

As previously discussed, consumers are subject to sales tax when making purchases of retail items.

If you are a business owner, you could be required to pay sales tax to each state if enough sales are generated in the state. This can get tricky if you are selling a lot of products in different states – which is common in the e-commerce industry.

A good rule of thumb is to pay attention once you begin approaching $100k in sales OR have a large number of transactions (about 100+) in any one state. Each state differs with requirements so be sure to do your due diligence.

The triggering event can be sales or transactions. So, even if you sell only $20k worth of products but have sold hundreds of units, this could be a triggering event. Also, be familiar with the types of transactions that are included and excluded. Exclusions may apply and it’s the business owner’s obligation to stay informed.

Here is a great article from Avalara providing the breakdown of each state for reference.

The Sales Tax Institute also has a state guide for nexus here.

Filing Sales Tax Returns: How Is E-Commerce Business Different?

An e-commerce company is usually selling nationwide across multiple states. Since each state has its own guidelines on when a company must collect and pay sales tax to the state, this may require you to file a sales tax return in each state. These can be due on a monthly basis so it is important to pay attention to your sales and determine if this needs to be done.

E-commerce businesses are different from other retail businesses that have a brick and mortar location because of their national distribution. This makes for an added layer of complexity from an accounting and tax standpoint.

I’d definitely recommend hiring a professional firm to assist in this process. There are many firms that specialize in this due to the complex nature of the law and requirements for businesses.

South Dakota Vs. Wayfair Supreme Court Case – Staying Compliant with State Sales Tax Laws

Continuing from my previous point, you need to stay compliant and don’t want to be caught off-guard and end up in hot water as Wayfair did in 2018 in the U.S. Supreme Court case South Dakota v. Wayfair, Inc.

The law used to require a physical location in a state in order to collect and pay sales tax. The recent Wayfair decision has made many states adopt the remote-seller nexus rules, therefore not requiring a physical location in the state for nexus to be created.

The reasoning for this is simply the amount of revenue being generated by online retailers is gigantic! We’re talking hundreds of billions of dollars each year. So, the states want their tax money.

E-Commerce Sales Tax Financial Process Recommendations

Any business selling in multiple states needs to understand their responsibilities in collecting sales tax and if nexus applies to them. A process should be established. I’d recommend working with a CPA firm or accounting firm that specializes in nexus sales tax. They can help you create checklists and workflows to ensure you are staying on top of things.

Important elements include the type of product or service, how much is selling, where inventory is kept, employees in other states, and any exemptions. Use this information to understand your risk towards nexus exposure and to create processes for e-commerce tax compliance.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER, at Applied Capital. Email him at [email protected] or fill out a contact form.

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This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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