Understanding E-commerce sales tax – a guide
Understanding the basics in the US and overseas
If e-commerce sales tax has you scratching your head, you’re not alone. It’s a complicated, ever-evolving beast that not only changes between countries, but in the case of the US, between states as well.
While we can’t promise you’ll be an e-commerce sales tax professional after reading this guide, it does cover the basics – and points you in the right direction of where and how to get started with sales tax in the US and internationally.
Some common terms
E-commerce sales tax is so complex, it almost needs its own dictionary. Here’s a quick explanation of the most common terms associated with sales tax in the US and Canada:
E-commerce sales tax – sales tax related to an online sale. It’s a consumption tax added to the retail price of your products, and your customers pay the tax when they make a purchase. In the US, there is no national sales tax because it is governed at a state level. Amazon sellers find themselves dealing with different tax laws and rules in each state. In Canada, it’s a federal-level tax called GST.
Local sales tax – on top of the state-level sales tax, some local municipalities also charge a sales tax. In Canada, you have local-level taxes for the 10 provinces only.
Total tax rate – state and local sales tax combined.
Sales tax nexus (US) – if you’re an e-commerce retailer, and you have nexus in a state, then you must register, collect and remit sales tax. Each state has its own conditions for what creates sales tax nexus.
Physical nexus – your business has a physical presence in a state – for example, a store, inventory, staff, or third-party providers – making you sales-tax liable
Economic nexus – your business has an economic connection to a state. Some states have an economic threshold you need to reach before you charge and pay sales tax. This might be transaction or gross sales based, and again, changes from state to state.
Origin versus destination-based – states decide whether the sales tax is based on the location of your business or where your customers receive their purchases. Most states are destination-based.
‘Carrying on business’ – Canada’s version of nexus. As an Amazon seller in Canada, you only need to worry about sales tax in the provinces that have Amazon FBA warehouses.
Taxable products – not all products are taxable, meaning you don’t add sales tax to their price. Most tangible personal property is taxable, but each state may have its own exceptions.
Simple steps to e-commerce sales tax in the US and Canada
- Determine sales tax nexus, either physical or economic, in each of the US states plus Washington DC. There are only five states which do not currently have a state-wide sales tax.
- Product taxability – establish if the products you’re selling are taxable in each state.
- Get registered – get compliant and register for a sales tax permit in your nexus states. This is usually done through the state’s tax authority. It’s illegal to collect sales tax without a permit.
- Collect sales tax through Amazon – thankfully, as a marketplace facilitator, Amazon is required to collect sales tax in the US on your behalf – but it needs to know in which states and on what sales. Make sure you’re correctly set up to collect sales tax in Amazon Seller Central using these easy to follow instructions .
- File a return – once you’re registered for sales tax, you must file a return on time, even if you’re reporting zero sales tax collected. Amazon only collects sales tax; it does not remit it for you.
Sales tax makes a lot of people nervous – accountants and Amazon sellers alike – but as Michael Fleming from Sales Tax and More puts it, it’s not a big deal if you’re only selling in a marketplace like Amazon, which does most of the work for you.
Michael says when it comes time to work with an e-commerce sales tax professional, make sure that person has the right experience – and connections.
“It’s about the capability of who you’re working with. We have tax partners around the world in all the major markets – Australia and Europe – we handle the US and Canada, and we refer back and forth.”
Selling overseas? Don’t forget your sales tax obligations
E-commerce knows no boundaries – you can market, sell, buy and ship to almost every corner of the world. Unfortunately, sales tax isn’t just a US and Canada thing.
Europe (including the UK)
In Europe, value-added tax (VAT) is the equivalent of sales tax – with a few differences. It’s a general tax applied to all commercial activities including production and distribution. Under EU law, each country can set its own VAT rate at or above 15%.
“Anybody who wants to trade internationally in the long-term should consult a professional tax advisor. Rules are changing all the time, especially with Brexit, and you’ll find there are new things you’re not aware of,” says Melanie Shabangu, client-managing director for AVASK in London.
Hong Kong has a relatively simple tax system with no sales tax, VAT or GST. You do, however, need to be mindful of profit tax – and whether this is something your business needs to pay.
What do the experts say is the most common mistake e-commerce sellers make in Hong Kong? Not filing their profit tax return on time.
Ray Ng from Unipro Consulting says to enlist the help of a local e-commerce sales tax professional.
“We have a typical case with a US client. He uses our service because his company is registered in Hong Kong. We take care of his tax obligations here, but he also has another accountant in the US to handle his global tax filing.”
Australia and New Zealand
For US-based e-commerce sellers, your main tax obligation in Australia is GST and depends on whether you’re importing and storing goods, and your volume of sales.
“E-commerce is a growth industry, and it’s complex, so you really do need to specialise in the area to understand the nuances and issues that sellers aren’t often aware of,” says Jason MacDonald from White & Black Chartered Accountants.
His advice: get GST registered, ensure your GST settings in Amazon are correct, and avoid paying more than you need to.
GST in New Zealand is a 15% tax added to the price of most goods and services – including most goods imported by foreign sellers.
Brad Golchin, managing director of Wise Advice, has one piece of advice: get to know the jurisdictions you’re selling in, or find someone who does.
Also, a trick for e-commerce businesses operating internationally – keep local currency for all the jurisdictions you’re likely to owe tax in.
Go forth and tackle the world
As the e-commerce world continues to grow, change and evolve, so too will sales tax. E-commerce sellers are operating in unprecedented territory, moving at a rate that international governments are running to keep up with.
Do your best to understand the basics of sales tax, what your obligations are as an e-commerce store owner locally and internationally, and how to go about collecting sales tax as an Amazon seller. From there, if things are still a little overwhelming, consider working with an e-commerce sales tax professional – lots of A2X’s partners will be able to help you.
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