Understanding Ecommerce Sales Tax
Ecommerce sellers used to have a pretty easy time when it came to sales tax, but those days are gone.
In June 2018, a landmark case turned the tide on sales tax collection for good. The Wayfair vs. South Dakota ruling redefined the criteria for business owners eligible to pay sales tax.
Prior to this ruling, business owners needed physical presence in a state to be considered eligible to remit sales tax. This is no longer the case.
Ecommerce has become worth so much money that the physical presence rule became outdated. Business owners that cross a certain revenue threshold in any state, regardless of their location, may now be eligible to pay sales tax to multiple states.
This eligibility is referred to as “economic nexus”.
The rules around nexus differ in every US state, and are also affected by where your buyers live, where you live, and where you store keeps inventory - among other things.
In addition to ecommerce sellers now needing to pay attention to taxes, so do the marketplace facilitators. Numerous states have enacted legislation that requires sites like Amazon, eBay and Walmart to remit tax on behalf of sellers, which is far easier for the states to administer than tracking individual sellers themselves.
If you’re scratching your head here, you’re not alone.
In this guide to understanding ecommerce sales tax, the first part of our series for sellers:
Table of Contents
Please note, as these regulations are fairly new and still evolving, always go to an accountant or the official sites of each state for the most up-to-date and relevant information. We have a directory of trusted accountant partners here.
Basic Tax Terminology
Ecommerce 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:
Ecommerce 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’s governed at a state level. Ecommerce 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: Nexus refers to an economic link with a state. You will be considered to have a strong enough link that it counts as nexus when your business meets a revenue threshold set by that state.
If you’re an ecommerce 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 based on the number of transactions sold in that state, or perhaps gross sales. It varies from state to state.
Origin vs. destination-based states: This refers to how states determine the rate of tax a seller remits. If a state is origin-based, then the seller needs to collect the rate of tax for their local jurisdiction.
If the state is destination-based, as most of them are, the seller needs to remit the rate of tax of their buyers’ local jurisdiction. As you can imagine, the latter is a lot more difficult to keep track of.
‘Carrying on business’: Canada’s term for nexus.
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.
Remit: Remittance is the act of sending the appropriate amount of tax you have collected to the relevant collecting authority.
Marketplace facilitator: These are sites that host third-party sellers. They quite literally facilitate a marketplace. Amazon, eBay, Walmart and Etsy are all examples of marketplace facilitators, whereas Shopify is not, since it is a platform for a seller to build their own store, not participate in a marketplace.
Marketplace facilitators do some of the work for you. So before we crack into the sales tax collection and remittance process, let’s check out what may be covered already by the platforms.
Some of the US states have enacted marketplace facilitator laws.
These put some of the sales tax collection obligations back onto ecommerce platforms and lessen the load for individual sellers.
Almost every state has regulations like these:
This may mean that sales tax collection and remittance is taken care of for you.
Like most facets of sales tax, however, the requirements of facilitators like Amazon, eBay, Walmart and Etsy, vary by state.
You may still be required to collect and remit in certain scenarios, so make sure that you have a clear understanding of each state with which you have economic nexus.
And if you’re a Shopify seller, these laws don’t apply to your store. You are responsible for your sales tax compliance.
5 Simple Steps to Ecommerce Sales Tax Compliance in the US and Canada
These are the simplified steps to becoming tax compliant.
Scroll down for detailed guides related to each ecommerce platform which show rates across the US, what that particular platform may or may not handle for you, and how to set up sales tax collection on your platform.
Determine where you have economic nexus
To do this, list the states where you sell, store inventory, have any employees, and include where you live. Check their nexus threshold and figure out whether you meet this. For all the states whose threshold you meet, you have economic nexus there.
Determine whether your products are taxable
Establish if the products you’re selling are taxable in each state. These may differ by state, so ensure you have checked the official sites of each. Links to these sites can also be found in the guides for each platform listed below.
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
As mentioned above, marketplace facilitators are now required by many states to collect tax for you. Where this is the case, ensure that you have correctly set up your sales tax collection settings on your ecommerce platform.
If a state does not require the marketplace facilitator to collect sales tax, but you have nexus there, you may still need to collect, so make sure you do!
File a return
Once you’re registered for sales tax, you must file returns on time, even if you’re reporting zero sales tax collected. Marketplace facilitators only collect sales tax; they don’t remit it for you.
Sales tax can make people nervous – accountants and ecommerce 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 one marketplace, which may do most of the work for you. This is for marketplace facilitators only like Amazon, eBay, Etsy and Walmart - not Shopify.
Michael says when it comes time to work with an ecommerce 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? There’s a Tax for That
Ecommerce 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.”
- Melanie Shabangu, client-managing director for AVASK in London.
Additional guides for taxes in the UK and Europe:
- The Ultimate VAT Guide for Amazon Sellers in the UK & Europe
- The Ultimate Guide to eBay VAT
- Shopify VAT
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 ecommerce 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 ecommerce 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.”
Additional guide for taxes in Hong Kong:
Australia and New Zealand
For US-based ecommerce sellers, your main tax obligation in Australia & NZ is GST and this depends on whether you’re importing and storing goods, and your volume of sales.
“Ecommerce is a growth industry, and it’s complex, so you really do need to specialize in the area to understand the nuances and issues that sellers aren’t often aware of.”
- Jason MacDonald from White & Black Chartered Accountants.
Jason’s advice: get GST registered, ensure your GST settings 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 ecommerce businesses operating internationally – keep local currency for all the jurisdictions you’re likely to owe tax in.
Additional guide for taxes in Australia and New Zealand:
Key Takeaways for Ecommerce Sales Tax
- Don’t skimp on or skip sales tax. Ecommerce sellers are under the microscope now more than ever.
- The “Wayfair decision” was pivotal in ecommerce sales tax regulations, and states are coming after sellers who do not comply.
- Each state has different rules about whether you need to pay tax and how much.
- The best place to start is by figuring out which states consider you to have nexus with them.
- Make sure that you register for sales tax in these states and get a permit before you start collecting sales tax.
- Remember that if your marketplace facilitator collects tax for you, you still need to remit the tax.
- Remember that if your marketplace facilitator doesn’t collect tax for you, but you have nexus in a state, you need to collect the tax yourself.
Tax Guides for Ecommerce Sellers
Here at A2X, we like to make sellers’ lives as easy as possible.
For that reason, we have prepared guides for each ecommerce platform with all the information you need to start strong with sales tax, wherever you are. Bookmark these for quick and easy access to everything you need to know.
We endeavor to keep our resources as up to date as possible. We do, however, recommend seeking the advice of an accountant for any tax-related queries unique to your business as these are still changing all the time.
- The Ultimate Guide to Amazon Sales Tax
- The Ultimate VAT Guide for Amazon Sellers in the UK & Europe
- How-to Guide: Collecting Amazon Sales Tax
- How to Collect VAT Through UK Amazon Seller Central
- Sales Tax Strategies for Amazon FBA Sellers
*NB: Shopify is not considered a “marketplace facilitator”, so is not obligated to collect sales tax for you.*
That’s right, there isn’t just one way you can do your taxes. And that’s what we’re going to cover in the next part of our sales tax for ecommerce sellers series: Sales tax strategies.
Master Sales Tax Collection with A2X
Sellers need to know what their sales tax obligations are and keep track of how much they’re collecting in order to be compliant.
But if your settlement statements don’t break this down for you, how will you know the amounts to put aside?
Well, without A2X, you’ll need to figure this out manually.
By integrating A2X with your accounting software and ecommerce platform, each bank deposit will be automatically calculated and broken down for you.
A corresponding journal summary that lists every income and expense line that you need is posted to your software, and instantly, you’ll have your sales tax collection figures.
Not only will it be easier to file your taxes, but calculating your profit margins and tracking your COGS (cost of goods sold) is much quicker too.
A2X also splits statements that span months, and organizes your books via the accrual method for accurate forecasting. It’s accurate ecommerce accounting without the fuss.
Next in the Series…
This blog is the first chapter of our A2X Ecommerce Accounting Hub sales tax series.
Next up: sales tax strategies for sellers, because there isn’t just one correct way to file.