With the increased complexity of regulations, dedicating enough time to understanding online sales taxes can be challenging. Fortunately, we’ve compiled all of the necessary information into this ultimate guide so that you can have an easier time navigating the world of digital taxation.
In this guide, you’ll learn what states charge online sales tax, the best software tools for online sale tax compliance, and more. Let’s get started!
What is Internet sales tax?
Internet sales tax is a type of taxation that applies to transactions made from the sale of goods and services over the Internet.
Online retailers are required to collect, report, and remit state and local sales taxes based on where the buyer resides. This can create a burden for small businesses, who may not have the resources or expertise to manage their complex small business tax obligations.
Be sure to research if your state requires a sales tax permit to collect sales taxes for online sales.
Are online sellers required to collect sales tax?
Yes, online sellers are required to collect sales tax from customers when they make purchases online.
In 2018 the Supreme Court case South Dakota vs. Wayfair, Inc. led to new internet tax reform saying that states can require online out-of-state sellers to collect and remit sales tax, whether the seller is physically located in that state or not. This impacted the final sales price of many popular products to sell online.
This is generally done by either including a sales tax calculator on the check-out page or by automatically calculating the sales tax into the total cost of the purchase.
Depending on the state, local taxes may also need to be collected and accounted for.
How do online sellers pay sales tax at the right amount?
Online sellers can ensure they’re paying the correct amount of sales tax on their products and services by following two main procedures:
- Researching and monitoring local, state, and federal laws – It is crucial for online businesses to be up-to-date on all sales tax rules and laws in the states where they are selling their products or services.
- Using a reliable Sales Tax Automation software – By using a compliant software solution, online sellers can easily automate the process of calculating taxes at the right rate based on customer location.
Understanding the Sales Tax Nexus for Remote Sellers
Understanding the Sales Tax Nexus for Remote Sellers is critical for businesses that sell goods and services remotely.
There are four main types of sales tax nexus that apply to remote sellers:
- Physical Nexus – This represents a physical presence in a state, such as having property or employees in the state.
- Click-Through Nexus – Certain states have passed laws that treat online retailers who refer shoppers to them as having a physical presence within the state even if they don’t have any other ties there.
- Affiliate Nexus – This arises when an online seller has affiliates or independent contractors located in another state, allowing that state to claim some form of connection to the business.
- Economic Nexus – This refers to when a business reaches certain thresholds for either the number or dollar amount of sales made via residents of a particular state, giving that state the right to collect taxes on those transactions.
What states charge online sales tax?
Most states in the US now charge sales tax on online purchases of tangible personal property made by customers within their borders.
Currently, 46 states and the District of Columbia have laws requiring online retailers to collect sales tax from customers, with some states applying different rates depending on the type of product or service being sold.
States with an Economic Sales Tax Nexus
States with an economic sales tax nexus require businesses to collect sales tax from customers based on a certain threshold of revenue or the number of sales made in the state.
Currently, these states include:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- 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
States with a $100,000 Sales Tax Threshold
Most states have set a specific threshold of $100,000 for sales before online vendors have to start collecting sales tax from customers, including:
- Alaska
- Arizona
- Arkansas
- Colorado
- Connecticut
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Missouri
- Nebraska
- Nevada
- New Jersey
- New Mexico
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
States with a $250,000 Sales Tax Threshold
Only Alabama and Mississippi have an economic nexus threshold of $250,000 in sales only.
While Mississippi counts all online transactions, Alabama excludes sales made through a registered marketplace facilitator, wholesale sales, and certain services.
States with a $500,000 Sales Tax Threshold
Texas, New York, and California are the only three states with a $500,000 sales tax threshold.
What are the Streamlined Sales and Use Tax Agreement?
The Streamlined Sales and Use Tax Agreement (SSUTA) is an agreement between states that streamlines the collection of sales and use taxes.
The agreement enables businesses to easily remit sales and use taxes in all participating states.
The SSUTA simplifies compliance by standardizing definitions, procedures, tax base, and software requirements across member states. It also provides relief from internet-based taxation for qualifying small business vendors by capping their liability for taxes.
How to Ensure Your Business Complies with Online Sale Tax Laws
If you’re selling products online, it’s important to understand and comply with the applicable state tax laws for online sales.
To ensure your business is compliant, here are some tips to help you navigate through this complex area of web-based commerce:
- Research the Laws in Your State: Learn about all the rules and regulations that apply to collecting, remitting, and reporting taxes on online sales transactions in your state. Doing so will help you stay up-to-date, and also ensure that you’re collecting the correct amount of taxes from your customers.
- Charge the Correct Tax Rates: Make sure you are charging customers the correct amount of tax based on their location. Be aware that rates can also change depending on where goods shipped or services performed by you take place.
- Collect Customer Information Accurately: Ensure customer information such as their name, address, telephone number, and email address is collected accurately so that it can be used for sales tax filing purposes if necessary.
- File Returns On Time: File all necessary returns for each taxable period accurately and on time to avoid any penalties or fines from your state department of revenue or other taxing authorities.
Best Software Tools for Online Sale Tax Compliance
Stay up to date on the latest online sales tax compliance regulations with the best software tools.
Managing sales taxes can be complicated, but these solutions streamline processes and stay on top of changes in policy so you don’t have to.
- Avalara – With over 1,200 signed partner integrations, Avalara seamlessly connects to many of the business applications that you are already using – such as popular ERPs, eCommerce systems, accounting tools, and other solutions.
- TaxJar – Say goodbye to your most time-consuming tasks like correctly calculating sales tax rates, categorizing products, and managing multi-state filings. With TaxJar you can rest assured that your business operations stay efficient, reliable, and consistent.
- Vertex TaxCompliance – Vertex software and services make filing returns to local tax authorities a breeze, accelerate cross-border commerce with confidence, maximize internal efficiency, and optimize the online customer journey.
This table summarizes and compares the key features and benefits of each software tool, making it easier for you to choose the right tool for their business.
| Software Tool | Key Features | Benefit to Your Business |
| Avalara | Over 1,200 signed partner integrations. Seamlessly connects to many business applications like ERPs, eCommerce systems, accounting tools, etc. | Streamlines sales tax compliance by integrating with your existing business tools |
| TaxJar | Automates tasks like calculating sales tax rates, categorizing products, and managing multi-state filings | Eliminates time-consuming tasks, ensures efficient and consistent business operations |
| Vertex TaxCompliance | Facilitates filing returns to local tax authorities, accelerates cross-border commerce, optimizes the online customer journey | Makes tax filing easier, enhances cross-border commerce, improves online customer experience |
Leveraging Marketplaces for Sales Tax Compliance
In the online sales landscape, marketplaces have emerged as powerful platforms that not only provide a space for sellers to reach a wide audience but also take on some of the burdens of sales tax collection. This section of our guide will discuss the role of marketplaces in sales tax compliance and how sellers can benefit from these platforms.
Online Marketplaces and Tax Collection Responsibility
Following the South Dakota v. Wayfair Inc. ruling, many states in the U.S. have passed Marketplace Facilitator laws. These laws require online marketplaces like Amazon, eBay, Etsy, and Walmart to collect and remit sales tax on behalf of third-party sellers for sales made through the marketplace. This is a significant advantage for small businesses that often lack the resources to handle the complexities of sales tax.
If you sell through these marketplaces in these states, you won’t have to worry about setting up to collect sales tax. However, you are still responsible for tracking your sales for record-keeping and monitoring if you have crossed any economic nexus thresholds in states where you sell directly.
Benefits of Using Online Marketplaces
Online marketplaces can offer a range of benefits for small businesses, especially in terms of sales tax compliance. Here are a few of the key benefits:
- Simplified Tax Collection: Online marketplaces automate sales tax collection, reducing the burden on small businesses. This can save time and resources for businesses that may not have dedicated staff for handling tax matters.
- Reduces Risk of Non-Compliance: With the marketplace collecting and remitting sales tax on behalf of the sellers, businesses reduce their risk of non-compliance with sales tax laws.
- Expands Business Reach: Online marketplaces enable businesses to reach a wider audience without the need to establish a physical presence in other states, allowing for business growth without the added sales tax complications.
The role of marketplaces in online sales tax compliance is a key consideration for businesses navigating the digital commerce landscape. By leveraging these platforms, businesses can focus more on their core operations and less on the complexities of sales tax collection and remittance.
Are there any online sales that are not taxable?
Small business owners should be aware that there are certain online sales that are not taxable.
Depending on the state, there may be different thresholds that dictate what is and isn’t taxable. For example, in some states, you can make a certain amount of money from online sales before they are taxed.
It is important to understand the laws of the state in which your business operates and to ensure taxes are up-to-date.
Can you avoid internet sales tax?
It is possible to avoid internet sales tax by following certain procedures. Depending on the state, there may be different regulations that apply.
For example, some states require businesses to collect taxes on any sales over a certain threshold.
Other states may not need any taxes at all. It is important to research and understand the regulations and sales tax laws in your own state before engaging in any online sales activity.
What is the internet tax rate?
The internet tax rate varies from state to state. Most states use a destination-based sales tax collection system, which means that sellers are responsible for charging the sales tax rate based on the address of where their customer has their items shipped.
The rates can also vary depending on the local jurisdiction, such as at the city or county level, making the calculation of an accurate internet tax rate more complex.
When did internet sales tax start?
The internet sales tax was first introduced in the United States in 2018, when the Supreme Court issued a ruling that allowed states to collect sales tax from online retailers, regardless of the retailer’s physical location.
There’s a large impact of an online sales tax on small business entities operating within the US, as they now have to navigate complex regulations and pay taxes like any other business.
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This article, "The Ultimate Guide to Online Sales Tax (2023)" was first published on Small Business Trends
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