Sales Tax: Understand Your Obligations and Make a Plan
Sales tax for ecommerce sellers is relatively new and continually evolving.
When bricks-and-mortar stores were the only retailers, knowing where to pay your taxes and to whom was straight forward. You had a physical location which gave you “ nexus” in a particular state; a link strong enough that you needed to pay tax, and that was pretty much the end of the story.
With millions of dollars moving into the cloud space and no physical locations to pin them to, governments faced two problems:
Bricks-and-mortar retailers were at a disadvantage, subject to taxes that ecommerce sellers were avoiding.
Governments were missing out on a piece of a very large pie, one exploding in size and not going anywhere.
As a result of this, a precedent was set in the landmark Wayfair vs. South Dakota case in 2018. Judges ruled that physical presence was no longer the criterion for nexus, making way for a wave of new rules and obligations for digital retailers.
In this article, we give you a brief overview of your tax obligations and what to be aware of.
For more in-depth guides, see our others below:
- Understanding Ecommerce Sales Tax
- How-to Guide: Collecting Amazon Sales Tax
- An In-Depth Tax Series for Amazon & Shopify
- How to Collect Shopify Sales Tax
- eBay Sales Tax: Everything You Need to Know
- Walmart Sales Tax
Why the Confusion about Sales Tax?
In the United States, there is lots of confusion surrounding sales tax among ecommerce sellers. This is due to a concept called nexus, which refers to having an economic connection or link to a state.
To understand why nexus is such an important consideration for sellers, we need to take a look at how the retail landscape has changed over the past few decades.
“In 2019, e-retail sales accounted for 14.1 percent of all retail sales worldwide. This figure is expected to reach 22 percent in 2023.”
Before ecommerce and large scales online marketplaces such as Amazon and eBay gained prominence, most retail business in the US was conducted by bricks and mortar stores. It was simple for states to collect sales tax and the process of remitting taxes (and understanding where you have obligations) was straightforward for businesses - simply register where you have employees or a physical presence.
The sudden and gigantic growth of ecommerce has resulted in the individual states collecting fewer sales tax, as their local stores are increasingly moving online.
“The days of buying items on the internet because you “don’t have to pay sales tax” are pretty much over. It won’t happen overnight, but we’re definitely moving in that direction.”
- Patti Scharf, Catching Clouds
The “Wayfair decision” gave states the ability to set their own rules regarding sales taxes and pressure anyone selling to people in their state to register for sales tax.
This presents a challenge for businesses that sell online, as the marketplaces allow anyone to purchase goods for sale, regardless of their physical location. Ecommerce sellers can take orders from all 50 states.
Whilst this presents an enormous opportunity for growth, it also casts a wide net of potential tax exposure for sellers.
So, how do you start in deciding where to register?
Crafting a strategy for how to handle sales tax obligations is important to consider early on, however, it is even more important to get your business up and running and prove your idea out first.
If you are storing and shipping products yourself, then you will only need to register for sales tax in your home state to begin with.
If you are using Amazon FBA to manage fulfilment, for example, then your products will be stored in warehouses spread across 25+ states, which creates nexus throughout much of the country.
For a small business, registering and filing regular returns in numerous states can become very expensive and time-consuming. Luckily, there are apps such as TaxJar and Taxify that automate away the calculation and filing of returns.
They help you to gain a clear understanding of where you owe sales tax, and how much is owing in each state.
At the end of the day, it’s a risk management decision and you need to weigh up the cost vs. potential risk in every scenario. Scott Scharf from Catching Clouds shares his thoughts about where you should register for sales tax in this video.
A common way to manage sales tax registration is to set thresholds
Once your ecommerce business has gained some traction, the question of where to register for next might come to mind.
To minimize risk, whilst keeping costs down, some sellers set thresholds to help determine which states they will register in next.
“When the sales tax I should have collected in any given state crosses $500 or $1,000 or $2,000, that’ll be my alert to go register in that state.”
- Jeremiah Kovacs, Muse Minded
Some states have a minimum threshold where you don’t need to file a tax return until you have made a certain number of sales in that state.
South Dakota for example, does not require sellers to collect sales tax until they have sold $100,000 worth of goods or made 200 sales. This resource by TaxJar provides more information about filing frequencies and tax rates for each state.
As a new seller, your chances of being caught out for not paying sales taxes are very low. The states have limited resources, so you would expect them to chase larger sellers first.
However, some marketplace facilitators do share information with states, so there is a risk of receiving notices. If you can’t sleep at night knowing that you might be caught out, it’s probably worth registering for sales tax wherever you have nexus.
What is the equivalent tax in Europe, and do I have obligations there?
If you are selling into Europe, you may need to pay VAT, or “value-added tax”.
This is essentially the same as US sales tax in that it is paid by consumers but collected and remitted by you. Each member state of the EU has to follow certain rules, but within those, they can set their own rates and thresholds.
If you do business in the UK, you will need to stay abreast of the potential changes caused by Brexit. As the UK leaves the EU and its VAT regulations, there is no guarantee that it will keep to those rules.
For more in-depth information on VAT collection, see our guides below:
- An In-Depth Tax Series for Amazon & Shopify
- The Ultimate VAT Guide for Amazon Sellers in the UK & Europe
- The Ultimate Guide to eBay VAT
- The Impacts of Brexit and COVID-19 on the UK Ecommerce Market
Australia is a new market with plenty of potential - what about GST?
Goods and services tax (GST) is the Australian version of sales tax.
In Australia, you can get set up and sell goods without being registered for GST to begin with. This can be a good way to test the market before investing larger amounts of money. However, you will be charged import GST on any products over the value of $1,000 - so it may be worthwhile registering in order to claim back the cost of GST on the stock that you bring in.
When you’re entering new markets such as Australia, it is crucial to ensure you are choosing the right products for that location. Make sure that you conduct proper product research to ensure that your product meets the country’s requirements.
Make changes to the product specifications if needed (for example, different plugs for electronic appliances), and find a good local accountant that understands the specific needs of ecommerce operators. We have a directory of trusted accountants experts in ecommerce accounting and A2X here.
Make Life Easier with A2X and Automation
Comprehensive systems can be very helpful to ensure that you don’t miss any important information, or forget a tax filing date.
Set up your tech stack to automate away as much work as possible. When cloud-based software handles repetitive tasks, not only does it free up your time to do higher level work, but it also ensures that information is entered accurately by removing the possibility of human error.
A2X connects your seller account to cloud-based accounting software such as Xero and QuickBooks to simplify settlement accounting. There is a wide range of different integrations and plugins that can be used to automate your systems and ensure that your backend is as efficient as possible.