Whether you’re just starting your e-commerce business or adding an e-commerce store to your existing brick-and-mortar, it’s crucial to fully understand internet sales tax rules.
In the United States, sellers are only required to collect sales tax from buyers in states where they have “sales tax nexus” or a significant presence in a state. You always have sales tax nexus in a state if it is your home state and/or if you have an office, store, warehouse, sales representative, or employee located in that state. The government also considers you have nexus if you sell products in a state’s trade show or craft show.
Forty-five states and the District of Columbia require consumers to pay sales taxes on purchases; retailers must collect the sales tax and remit it to the state.
For years, how states should tax internet sales had been a hot button for small and large businesses alike. While previous attempts at new legislation had failed, in the Spring 2017, Congress enacted both the Marketplace Fairness Act of 2017 (MFA) and the Remote Transactions Parity Act of 2017 (RTPA). Both acts require remote sellers to collect taxes on goods purchased from their states. Although the taxes were always required in states that have sales tax, few consumers actually pay those taxes and the states lose potential income. The legislation provides states the authority to enforce existing state and local sales and use tax laws and eliminates the competitive advantage currently enjoyed by remote sellers at the expense of local businesses.
Small Businesses Online & Amazon
The legislation is a bigger burden to the big guys and therefore Amazon has been collecting sales tax from customers in states with sales taxes since early 2017. Under the MFA, sellers that make $1 million or less in annual nationwide remote sales and have no physical presence in the state are exempt. According to the Small Business Administration, 99% of the online sellers are “small” and very few would be required to collect and remit sales taxes.
The RTPA has different criteria for the small seller exception; it exempts sellers with less than $10 million, $5 million, and $1 million, respectively, over the first three years. Under the RTPA, however, any seller who sells through an electronic marketplace like Amazon would not qualify for the small seller exception.
If you are a Fulfillment by Amazon seller, you can sign up and pay to have Amazon collect the sales taxes for you. While many FBA sellers don’t do so for states where they don’t have a physical location, several states have proposed laws that would require third-party sellers to collect sales taxes regardless of nexus.
Incorporate in a Different State Can Provide Some Relief
One way to relieve some of the tax collection burden from internet sales tax rules (especially if you’re a third-party seller) is to incorporate in a state where there is no sales tax or sales tax only on certain items such as Delaware, Nevada, and Wyoming.
You can either dissolve your current corporation and restart in a new state or keep your current business location and start a new corporation for your Amazon sales in a tax-free state.
So What Things are Actually Taxable?
Most tangible personal property is taxable. So, if you sell a product like household and personal items, you will generally be required to charge sales tax on those items.
But some states make an exception for some groups of items. For example, clothing is not taxable in Pennsylvania, textbooks are not taxable in Minnesota, and groceries are not taxable in many states.
Because the tax liability of your business varies so much state by state, it’s important to consult each state’s Departments of Revenue to be sure.
Start with TaxJar for a state-by-state guide to taxable items and applicable exemptions.
Like selling products online, taxable services online depend on the state where you make the sale. Five U.S. states (New Hampshire, Oregon, Montana, Alaska, and Delaware) do not impose any general, statewide sales tax, whether on goods or services.
Of the remaining 45 states, four (Hawaii, South Dakota, New Mexico, and West Virginia) tax services by default, with exceptions only for services specifically exempted in the state law.
The other 41 states (and the District of Columbia) where services are not taxed by default, vary by the service and by the state. Every one of these states taxes a different set of services.
In general, online services potentially taxable include:
- Business services such as telephone answering services, graphic design, and business consulting.
- Personal services such life coaching and interior design advice.
- Professional services such as legal and accounting services are the least taxed service area, in part because professional groups have powerful lobbying presences.
Again, check with each state’s Department of Revenue to be sure. Avalara has a helpful map for taxable services by state.
How to Get Started With Collecting Internet Sales Tax
Retailers who sell items subject to sales tax must first be approved for sales tax registration in the state. Once you have applied for your sales tax registration and receive your business license, you’re set up to start paying your sales taxes.
When assigning you a sales tax permit, your state will also assign you a filing frequency and sales tax due date. Sales tax filing frequencies are usually either monthly, quarterly or annually. In general, the more revenue your business generates in a state, the more often that state will want you to file a sales tax return.
Some states won’t make filing an easy task. They require you to break down how much sales tax you collected not just by state, but by city, county and other special taxing districts (such as an education district) within that state.
The Ongoing Debate About Internet Sales Tax Rules
Although the internet sales tax rules are enacted, the legislation is still under scrutiny and we may see more pushback from companies negatively affected by the rules.
Recently, internet retailers have sued the state of Ohio, opposing its new sales tax on out-of-state merchants whose websites appear on computers and phones in Ohio. The American Catalog Mailers Association sued the Ohio Department of Taxation calling the laws “unconstitutional and unenforceable.”
In the meantime, small businesses are smart to employ both their CPAs and their attorneys to make sure online sales are compliant with new internet sales rules.