The explosive growth of e-commerce has greatly transformed how businesses operate, offering endless opportunities for sellers to reach customers worldwide. Alongside this evolution, the issue of internet sales tax has become more significant than ever.
Business taxes have always been complicated. But today’s online sellers have to navigate complex and ever-changing sales tax regulations, which were further complicated by the landmark South Dakota v. Wayfair decision in 2018. If you’re an online business owner, understanding these rules is crucial for staying compliant and avoiding costly penalties.
In this guide, we’ll explain the essential facts about internet sales taxes to help you manage them effectively.
Internet sales tax refers to the tax imposed on goods and services sold through online platforms. It’s essentially the same as the sales tax collected by traditional brick-and-mortar stores, but the collection process is more complicated for online sellers. The primary purpose of internet sales tax is to generate revenue for state and local governments while allowing fair competition between physical stores and online retailers.
Unlike physical retailers, online businesses often operate across state lines. This often means sellers must collect sales tax based on the location of the buyer rather than their own business location. For example, if you’re an online seller based in Texas, but your customer is in New York, you might need to collect New York sales tax depending on your sales volume in that state. This multi-state aspect of online sales tax is why understanding and complying with these rules can be challenging.
Some sellers mistakenly believe that if they don’t have a physical store, they’re exempt from collecting sales tax. However, as we’ll explore further, sales tax laws now go beyond physical presence, making compliance a trickier requirement for many online businesses.
In 2018, the Supreme Court decision in South Dakota v. Wayfair redefined the rules of internet sales tax. Before this ruling, businesses were only required to collect sales tax if they had a physical presence — such as a store, office, or warehouse — in a given state. This standard, known as “physical presence nexus,” allowed many online retailers to avoid sales tax obligations in states where they lacked a physical footprint. As a result, states lost a lot of potential revenue from their sales and use tax budgets.
The Wayfair decision introduced the concept of “economic nexus,” which requires businesses to collect sales tax based on their economic activity within a state, even if they don’t have a physical presence. Most states have since adopted economic nexus laws, which typically include thresholds for sales revenue or the number of transactions. For instance:
This shift has significantly impacted e-commerce businesses. Small sellers who previously could have operated without sales tax concerns now face the challenge of tracking their economic activity across multiple states and determining where they must comply. Large businesses, which already handled multi-state taxes, have had to adjust their systems to accommodate new nexus rules.
One of the most challenging aspects of internet sales tax is that rules vary widely from state to state. Every state with a sales tax has its own laws regarding economic nexus, tax rates, filing requirements, and deadlines. Some states also have local tax rates that vary within their borders, adding another layer of complexity.
For example:
To navigate these state-specific online sales tax rules, many business owners use sales tax software or services that track thresholds and rates for all 50 states. Ultimately, it’s your responsibility to stay informed about the rules in states where you operate so you can comply with those requirements.
Determining whether you need to collect internet sales tax starts with understanding the concepts of nexus. As we’ve already mentioned, there are two primary types to consider:
To determine your sales tax obligations, you’ll have to do some research. For example, let’s say you are a Texas-based business, and you do the majority of your online sales in that state. But every once in a while, you get a customer or two from Oklahoma. Because you only have a few sales, you wonder: are you required to collect and pay sales taxes for Oklahoma?
According to Oklahoma law, you’d probably be eligible for the small seller exception, which excludes remote sellers who had less than $100,000 of in-state sales of tangible personal property during the last 12 months. In this example case, you’d probably be exempt from Oklahoma sales tax requirements (unless you sell luxury goods that exceed the threshold).
The takeaway? If you’re selling online, it’s your responsibility to regularly review your sales and transaction history to see which states you have sales in. From there, you’ll need to determine where you meet sales thresholds. For each state where you meet the economic nexus threshold, you’ll have to register for sales taxes and remit them to the state.
Each state’s tax authority provides detailed information about its nexus thresholds and requirements.
If you’re a small online seller, you might be able to manually track and manage your sales tax responsibilities. But if you regularly have high sales volume from multiple states (or lots of small sales from dozens of states), odds are you’ll find it tricky to stay on top of these requirements.
Many sellers find it helpful to use tax compliance software like Avalara or TaxJar. These software programs help to automate sales taxes for you, tracking your economic nexus across multiple states.
Once you’ve determined where you need to collect sales tax, the next step is registering for a sales tax permit in those states. This process typically involves applying through the state’s tax department and providing details about your business.
After registration, you’ll need to:
Creating a sales tax compliance checklist can help you manage these responsibilities. Here’s a simple one that’ll work for many sellers:
Marketplace facilitator laws simplify internet sales tax compliance for many sellers. These laws require online marketplaces, such as Amazon, Etsy, and eBay, to collect and remit sales tax on behalf of sellers using their platforms. If you sell exclusively through these platforms, your sales tax obligations may be reduced, as the marketplace handles the heavy lifting.
However, it’s still essential to confirm whether marketplace facilitator laws apply in the states where you operate. It’s also your responsibility to check that the marketplace is collecting tax on your behalf; don’t assume they’re doing it.
Additionally, if you sell on these marketplaces and run your own site with sales, be sure that you’re still collecting and remitting sales taxes for the sales on your site.
Large platforms like Amazon provide detailed tax reports, making it easier to track compliance. Even with facilitator laws, sellers should stay informed about their tax obligations to avoid surprises.
Complying with internet sales tax rules can feel overwhelming, especially for businesses that sell across multiple states. It’s tough to keep track of different state laws and nexus thresholds, and knowing how much you sell in each state isn’t easy, either.
There are also multiple filing deadlines to tackle. It’s not uncommon for sellers to have to file monthly, quarterly, or even annually in different states. Missing these deadlines can result in penalties.
Here are a few steps you can take to help simplify your compliance efforts:
By taking a proactive approach to internet sales tax compliance, you can focus on growing your business without unnecessary distractions. Staying organized and using the right resources will make navigating these rules much easier.
Navigating internet sales tax rules might seem daunting, but with the right approach and tools, you can navigate the tricky world of sales tax compliance. Understanding the impact of the Wayfair decision, tracking state-specific regulations, and knowing your nexus obligations are all essential steps for online sellers. Whether you’re registering for sales tax permits, automating tax collection, or relying on marketplace facilitators, staying organized and proactive will help you avoid penalties and keep your business running smoothly.
By staying informed and using resources like tax software or professional guidance, you can focus on growing your e-commerce business while meeting your tax obligations confidently.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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