What are Sales Taxes?
US sales tax is a tax paid to a local governing body (State or Local) for the sales of certain goods and services. These laws require the seller to collect funds for the tax from the consumer at the point of purchase. The seller is then required to remit sales taxes collected into the state or local tax authorities. For large “Brick and Mortar” retailers (such as WalMart) understanding what jurisdiction to collect and remit sales taxes in is simple. The point of sale is where the buyer physically purchases the goods, which would be the State (or local town) of the store in which the purchase was made.
For online sellers (e-commerce), there is usually no physical store for which the purchase occurred. In most tax jurisdictions, Sales Tax for online sales is a DESTINATION-BASED which means the transaction is likely taxable in the State (or local town) for which the order was SHIPPED TO. This tends to alarm online sellers because at scale you can have orders shipped to many different jurisdictions.
As you can tell, this is a very complex area for online sellers. As a result, Sales Tax compliance questions are definitely some of the most frequently asked questions that we receive as a firm.
Where should I comply with Sales Taxes?
As an E-Commerce Seller, you need to comply in jurisdictions for which you have NEXUS. Nexus is a tax term that essentially means presence. The two types of Nexus are PHYSICAL NEXUS and ECONOMIC NEXUS.
What is Physical Nexus?
Physical Nexus focuses on the PHYSICAL PRESENCE presence of your business. Some common examples for online sellers include:
- Owner’s location – This includes where the owners are physically located and operating from.
- Inventory – This includes all states that you have physical inventory stored in (Warehousing, FBA, 3PL, etc)
- Office Space – This includes office workspace (either rented or owned) for which your operations occur.
- Employees – This includes where your W-2 employees are located. This ordinarily does not include independent contractors, including those that live overseas.
What is Economic Nexus?
The intent of the economic nexus is for Tax Authorities to generate sales tax revenues, even if the E-commerce sellers do not have a physical presence in their state. To simplify, economic nexus includes States for which you have no physical presence but have a high volume of sales.
Unfortunately, every state has its own rules so it requires lots of research and knowledge to become and remain compliant. Fortunately, most of the states have adopted similar rules, which we will present to you. Even with these similar rules being adapted, we do recommend that all E-Commerce sellers very closely analyze risk for economic nexus.
Most economic nexus states have adopted the following thresholds for the trailing 12 months:
- 200 sales transactions – This means 200 orders delivered into the state over the previous 12 months
- Or $100K in total Gross Sales over the previous 12 months.
If either of these rules are tripped up, the state views the Seller as having an Economic Nexus and technically requires the seller to be Sales Tax compliant going forward.
I have Nexus, what does Sales Tax Compliance Entail?
If you determine that you have nexus and need to be Sales Tax Compliant in a jurisdiction, you need to register with that jurisdiction to acquire a Sales Tax Permit (Some states have a different name for this, but it is essentially the same for each state).
Once you have a state Sales Tax Permit, you are required to charge sales taxes to your customers who ship their orders into the state. You are then required to remit (pay in) the collected sales taxes to the state that you’re registered in. For example, if you have a sales tax permit in NY you are generally required to charge sales taxes to any customers that SHIPS TO NY. Then you are obligated to remit those Sales Taxes collected to the state of NY.
Are Sales Taxes and VAT the same thing?
No! These are two separate and distinct tax types. They are similar in terms of their calculation, but “Sales Tax” typically pertains to state and local tax authorities in the United States, while VAT is applicable to sales that occur outside of the US.
As you can likely tell, Sales Taxes can be extremely complex. Our advice is to consider consulting with a Sales Tax professional that specializes in E-Commerce.
Many accountants are generalists and may not understand your business, which can create significant sales tax risk. Would you go to your primary doctor and ask them about cavities? (NO!) Then why would you go to your local town CPA and ask them about E-Commerce specific tax issues?
The Ecommerce Accountants is an accounting firm that specializes in Ecommerce Entrepreneurs including Amazon Sellers, Shopify Sellers, Digital Marketers, Dropshippers, Cryptocurrency Brands, and much much more! Our services include bookkeeping, sales tax compliance, income tax compliance, income tax planning, and CFO services.
For more information, visit our website @ www.theecommerceaccountants.com