The Ultimate Guide to Online Sales Tax

The Internet has been a huge boon to the economy and made life easier for consumers and businesses alike. Unfortunately, it has also created a whole new set of complicated rules that you need to follow when selling products online. The good news is that once you know these rules, they are very easy to follow. In this article, we’ll go over what online sales tax is and why you need to charge sales tax on online sales, even when you don’t have a physical storefront in your state.



What is online sales tax?

In its simplest form, online sales tax is the tax associated with the sale of a product or service from an online retailer or e-commerce business owner. This tax is imposed by the state in which the product or service is sold rather than the state in which the business is located.

Do you need to collect sales tax for selling online?

Yes, and online retailers have the 2018 Supreme Court ruling to thank for having to collect sales tax from shoppers and filling out tax returns. Prior to this, sales and use taxes were established under Quill v. North Dakota in the early 1990s. The resolution called on states to take advantage of sales and use tax collection and remittance obligations on online sellers based solely on their economic activities in the state.

In the early days of the internet, sales tax laws did not require online sellers to collect sales tax. However, with the increase in computer usage with the increase in the popular products to sell online, the growth of internet sales has increased exponentially. As a result, states have seen dwindling sales tax revenue from brick and mortar companies. This led them to expand sales tax requirements for online sellers in an effort to recoup state revenue, resulting in a change of laws.

This push eventually led to the Supreme Court in South Dakota v. Wayfair, Inc. In 2018. The case, sometimes known simply as “Wayfair,” overturned Quill and led to new online tax reforms.

The Wayfair decision states that states can require out-of-state online sellers to collect and remit sales tax, regardless of whether or not the retailer has a physical presence in that state. Because of this ruling, many states now have some form of law requiring Internet sellers to collect and file sales tax.

What businesses need to pay sales tax for online sales?

Wayfair’s decision affects remote sellers and market facilitators. And online retailers don’t just have to worry about collecting your sales tax. They also need to make sure that they pay the correct amount of sales tax on their products and services.

There are two ways companies can do this:

  • By demonstrating a physical presence or “link” in each state where they sell products or services
  • By meeting that state’s economic sales tax threshold.

Types of Nexus Sales Tax

Any telemarketer should be familiar with the different laws in different states. Provisions made by states are called a “Telecom Seller Association” or “Sales Tax Association,” and they define physical presence in a state. If they meet the definitions below, they must register and collect sales taxes as a retailer.

  1. Link click activity: This relationship occurs when an out-of-state company creates a click-through link in a state and an in-state company receives a commission for referring a certain amount of sales to the out-of-state company. This process is usually in the form of a link on a website that you have to “click” to access goods and services.
  2. Marketplace Nexus: This relationship comes into play when an organization operates in a country and provides the infrastructure for e-commerce. This infrastructure includes marketing, customer service, and payment processing services.
  3. Economic Relationship: The economic association requires that an out-of-state retailer collect sales tax once the total receipts activity or a certain level of sales transactions are met in the state in which they conduct the transactions.
  4. Nexus Corporation: Online retailers who use in-state subsidiaries to market and sell their products have sufficient affinity to require them to collect online sales and convert those sales and to take advantage of taxable retail sales of tangible personal services and property. With an affiliate association, online sellers must collect sales tax from their affiliates.

Online sales tax by state

The majority of the United States has established rules for online government sales tax. For example, Washington State requires all businesses doing business in the state to collect and remit sales or use taxes on taxable retail sales transactions unless certain exceptions apply (for example, clothing under $100).

Although there is no federal law requiring remote sellers with a virtual (online) presence to collect and remit online sales tax, the state tax authority says that online retailers without a physical presence in the state collect their own use tax.

Countries related to economic sales tax

The Economic Sales Tax Association requires online sellers to collect sales tax in states where their sales exceed cash or transaction limits. As mentioned, states take the legislative position that an organization has an economic relationship if the annual retail sales of its goods and services exceed the monetary limit or make a number of transactions. For example, Arkansas has an economic correlation threshold of $100,000 or at least 200 separate transactions.

Currently, 46 states and the District of Columbia have economic sales taxes. There is no online sales tax in Delaware, Montana, New Hampshire, and Oregon.

States that collect state sales tax and have an economic relationship include:

  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • California
  • Colorado
  • Connecticut
  • District of Columbia
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Yeah
  • kansas
  • Kentucky
  • Louisiana
  • who
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Mississippi
  • Missouri
  • Nebraska
  • Nevada
  • New Jersey
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Utah
  • Vermont
  • Virginia
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

Therefore, if your business sells products or services in one of the states listed, you are required to collect and remit state sales tax on those transactions if you exceed the economic interconnection threshold. The sales tax rate for each state varies from 1.76% in Alaska to 9.55% in Tennessee.

States with a sales tax limit of $10,000 to collect sales tax

There is no. Pennsylvania and Washington previously had legislation specific to the economic relevance of their $10,000 sales tax threshold. In 2019, both states enacted sales tax rules that raised their tax limits to $100,000.

Countries with a $100,000 sales tax limit

Most states have an economic bond threshold of $100,000. They include:

  • Alaska
  • Arizona
  • Arkansas
  • Colorado
  • Connecticut
  • District of Columbia
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Yeah
  • kansas
  • Kentucky
  • Louisiana
  • who
  • Maryland
  • Massachusetts
  • Minnesota
  • Missouri
  • Nebraska
  • Nevada
  • New Jersey
  • New Mexico
  • North Carolina
  • North Dakota
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • South Dakota
  • Tennessee
  • Utah
  • Vermont
  • Virginia
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

States with a sales tax limit of $250,000

Alabama and Mississippi are the only two states that have an economic bond limit of $250,000.

States with a $500,000 sales tax limit

Three states have an economic bond threshold of $500,000: California, New York and Texas.

interstate sales

If you sell interstate products or services, you should be familiar with the Simplified Sales and Use Tax Agreement (SSUTA). SSUTA is a multi-state agreement that allows remote sellers to collect sales tax at the customer’s home state rate.

For example, if a business is located in Florida but sells in Georgia, the business will collect Georgia sales tax. SSUTA is an interstate agreement that has agreed to simplify their sales and use tax laws to facilitate compliance by out-of-state sellers. Currently, there are 44 states (including Washington, D.C.) that are members of SSUTA.

How to make sure your business is sales tax compliant for online sales

It makes sense to ensure that your online business is compliant with the various sales tax laws. Here are some tips that you can follow to make things easier:

  • Determine if more than one state has a claim to your company (eg, Economic Association). If so, be sure to register as a seller in those states and collect their taxes.
  • Register for a sales tax pass in your association state by contacting the revenue department of the state in which your business is located. This process is usually done through their website or by mail.
  • Update your website sales tax settings to reflect the correct rates for the cases in which you have a relationship.
  • Find out how taxable your product is. Each state has its own rules and regulations when it comes to taxable products and services. It is important to understand these rules in order to charge the correct amount of sales tax on your products. You can find this information by contacting the Department of Revenue in the state in which your business is located or by visiting their website.
  • Make sure your accounting software is configured to track sales taxes by state.
  • Keep good records of all sales, including customer and product contact information. This precautionary step will help you in case you have any questions from the tax authority about a particular sale.

Software that can help make sure your business is sales tax compliant for online sales

To comply with online sales tax, it is important that you set up and start collecting sales tax for all online marketplaces and shopping. This means that you need to check each platform and see if they have sales tax collection feature. If so, it is better to use software tools rather than collect sales tax manually from your customers.

If your platform does not provide an automated sales tax tool, you can download TaxJar’s free sales tax calculator for a WooCommerce plugin or Chrome extension. This plugin will automatically calculate the amount of sales tax you owe and create a file for your customers. Then, you can upload this file to each market or shopping cart where your products are listed.

Next, report and file the sales tax by your local state and municipality. You will need to do this on a quarterly or annual basis, depending on your state’s requirements.

Another way to ensure that your business is compliant in collecting and remitting sales tax for online sales transactions is by using a reliable software platform.

Tax automation technology, such as AvaTax Compliance Cloud from Avalara, automatically calculates microtransaction taxes from country to country using reliable spreadsheets, rule engines, and real-time updates from thousands of sources.

Tax laws are constantly changing, and the Avalara tool checks and alerts you to any change in the law or tax rate. This relieves you of the burden of having to keep up with the constant changes in tax laws and rates.

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