As an online business owner, you may think that sales tax doesn't apply to you. That could be true, but it could also be false. It all depends on what you do in your business, where you are located and your state rules and regulations.
Over the past few years, sales tax has been evolving and changing and adapting to the focus of almost everything moving online and being available electronically.
At first, the rules of sales tax didn't apply very much to the online world because everything was delivered in a different format than if you were to go to a brick and mortar store and buy something similar, think ebooks versus paper copy books, and CDs and DVDs versus online streaming and digital purchases.
But sales tax for pretty much all of the states in the USA has evolved and is now covering these online products and services. I foresee sales tax continuing to evolve over the next several years as well. As a business owner, it's your responsibility to stay up-to-date on the tax laws that apply to your business.
In this article, I am going to simplify as best as I can the issues, changes, questions and implications of sales tax for online business. I want you to have clarity in this subject matter so that you have the knowledge of who to reach out to in order to make sure your business is operating correctly within the law.
So let's dive into Sales Tax for Online Businesses!
What are sales taxes?
Sales taxes are a tax that is charged to the final consumer or user of a product or service. These taxes are charged at the state and local levels. The federal government does not have a sales tax.
Remember this a cost to the final consumer or purchaser, it is not a tax that your business is a responsible for paying like income taxes.
You are legally obligated to obey these tax laws in your business, just like you are obligated to obey the income tax laws in your business too.
If you obey these laws at the beginning of your business, it's much easier and less costly to you and your business. Whereas if you were to ignore these laws, you are also going to pay fines and penalties and interest on top of what you owe for taxes.
Sales taxes are levied on tangible personal property and some services. It is your job as a business owner to keep up with the tax laws in your state, as well as when they change.
Tangible personal property is something that each individual person can own. It used to mean something that I can physically hold in my hand, but it has evolved with the online world evolving.
Sales taxes are determined by nexus.
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What is Nexus?
Nexus used to mean if you have a physical presence in that state. But thanks to the internet and the Supreme Court's decision in South Dakota v. Wayfair, Inc. and the changing of the way so many things are delivered to consumers today, the definition of nexus has changed as well.
Today, we have 4 different kinds of nexus: click-through nexus, affiliate nexus, economic nexus and marketplace nexus. Each of these are considered "Remote Seller Nexus" and that means it affects you as an online business owner.
Click-through nexus requires that a remote seller meet a minimum sales threshold in a particular state that results from activities of an in-state referral agent.
So in plain English, this means that if you have someone who assists you with making sales, like an affiliate that sends people back to your sales pages, the state that the affiliate lives in, gives your business nexus in that state.
But you do also have to meet the state's threshold for sales. The states that set their thresholds already can be found from TaxJar. Some states have not set their thresholds yet, but many states have, as well as effective dates of those thresholds. Make sure you are familiar with these effective dates as well because they do apply to your business.
Affiliate nexus requires that a remote retailer holds a substantial interest in, or is owned by, an in-state retailer. This in-state retailer then sells the same or a substantially similar line of products, under the same or a similar business name.
In plain English, this means the sales that are made under companies that do multi-level marketing and other similar companies, like doTERRA, Young Living, Younique, Paparazzi, and all of the companies where you are selling someone else's products. These products are taxable for sales tax purposes because of all of the sellers that are present throughout all of the states.
Due to these changing laws, most of these companies have been collecting and remitting sales tax, from what I have seen. There may still be some that are not collecting and remitting the sales tax, which means you as a business owner would be responsible for collecting and remitting the sales tax.
But your business may also fall under these laws, making you responsible to collect and remit sales tax as well. It depends on what you sell and who you work for.
Economic nexus requires no physical presence in the state, but it correlates to a set level of sales or gross receipts activity within a certain state.
This applies to ALL online businesses. And this is what has changed the most as a result of South Dakota v. Wayfair, Inc.
In plain English, if you have a certain number of sales and/or a certain amount of sales in a state, you have economic nexus. The state by state requirements for economic nexus can be found on TaxJar. But also keep in mind that some states have a certain amount of sales, anywhere from $10,000 to $500,000, some have a certain number of sales per state, and others have a requirement of both.
It is your responsibility as a business owner to make sure you are following the correct regulations when you meet these thresholds.
Marketplace nexus means that if an online marketplace operates it's business in a state, provides e-commerce infrastructure, customer service, payment processing services and marketing, the marketplace facilitator is required to collect and remit sales tax, instead of the individual sellers.
In plain English, this means that if you are selling things on places like Amazon and Etsy, Amazon and Esty are now required to collect and remit sales tax on your behalf of your sales.
Not all states have yet to implement the marketplace nexus yet, so this is something you are going to have to check on regularly if you sell your products on a marketplace.
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How do I Determine My Remote Seller Nexus?
This handy chart will help you determine when these nexus laws went into effect for each state.
On June 21, 2018, the US Supreme Court issued a decision in the case South Dakota v. Wayfair, Inc. This case has set the precedent for online businesses and the "Remote Seller Nexus."
Some states have not yet determined their Remote Seller Nexus requirements, but many have. You can find out more about these state by state requirements here. TaxJar is regularly updating their guide about the nexus requirements to help even more online business owners like you make sure you are applying the latest laws to your business.
But if you sell any kind of printable, ebook, course, product of any sort that when I purchase it, I know own it, it is taxable through sales tax. And you are responsible as a business owner to charge and collect this sales tax.
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Does my business fall under Sales Tax Rules?
Most likely. But I don't know your business, so I'm answering this question in a general sense.
If you sell something that is tangible personal property, meaning I get something I can keep and own, it doesn't matter if it's delivered through electronic means and it never leaves my computer, or something physical, then your business falls under the sales tax rules.
If you are someone who sells software of any type - email providers are considered software, social media schedulers like Tailwind, Buffer, Coschedule, etc. are software - your sales are taxable. This software can be operated through a website only, it's still software.
If you are someone who sells courses or ebooks, the courses and ebooks are taxable.
These taxability laws are different state by state. Most states have that the same things are taxable and the same things are not taxable. But not all of them do.
For example, here in Pennsylvania, clothing and food are not taxable. But I've been to many neighboring states that charge tax on clothing and food.
This is where it is on you as the business owner to do your research and know whether what you are selling is taxable or not.
If you still have questions after doing your research and/or consulting a sales/use accountant, then you can reach out to the individual states (their phone numbers are listed at the end of this article) to get further clarification on what is and isn't taxable.
How do I know if my sales are taxable or not?
It really depends on your state, but a general rule of thumb is that is anything that is physical tangible property (something I, as the buyer, can own) is taxable. This tangible personal property is anything I physically own, whether I have it in physical form or electronic form. But there are also some services that are taxable as well.
As a business owner, it is up to you to make sure you are following the laws and collecting and remitting sales tax on time and to the appropriate states.
If, after doing your own research, you still have questions about the taxability of what you sell in your business, then you should contact a sales tax professional in your state, or the state you have met the economic nexus thresholds for.
What if I don't collect sales tax?
If you don't collect sales tax, then the tax due, plus penalties, interest and fines, will come out of your business's pocket instead of the consumer's pocket.
Sales tax is not a part of your sales. It is something that the final consumer pays on their purchase.
When you collect sales tax on your sales, you are an agent of the state, collecting it for the state, then you send it on a regular basis, usually monthly or quarterly. It's not your money, or your business's money, it's the state's money.
Any money that you have collected from the consumer and not remitted to the state is considered trust fund monies. It is illegal to not remit these funds to your state. And you will be charged major penalties for not remitting these monies to the proper states.
Each individual state has an agency that conducts audits to make sure businesses are in compliance with the tax laws. And this is how it will be established that your business is not obeying the laws that have been set forth.
Obey the laws from the beginning of your business and avoid the extra penalties and fees and fines that are associated with an audit. It can get quite costly when you don't obey the laws.
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Sales Tax Exemptions
There are some exemptions to collecting sales tax as well.
Most of these exemptions are going to be accompanied by an exemption certificate from the person buying the goods from you. You, as a business owner, are responsible for keeping this exemption certificate on file. This exemption certificate will be your proof for why you did not charge sales tax on a certain purchase.
Another exemption can be from sales made to government agencies. They are also sales tax exempt.
When someone is buying from you to resell what they are buying, is also sales tax exempt, from you to the buyer. That buyer is then responsible for charging sales tax when they resell your items.
This also works in reverse, if you buy something to resell, you should not be charged sales tax on the purchase, but will charge sales tax on the sale when you resell it.
There are some services that are not taxable and there are services that are taxable as well. This is where you need to do your research.
In the case of an audit, not knowing is not going to hold up as a defense. It is your responsibility as a business owner to do the research and keep up with the laws and regulations.
Who Do I Contact with my Sales Tax Questions?
Each state has their legislation on their Department of Revenue website. There are also some very good sites that do a decent job of explaining the sales tax laws as well, TaxJar and Sales Tax Institute, come to mind.
You could also contact a sales tax accountant or the state's Department of Revenue.
When you contact your state, make sure you have your questions written down, either on paper or in a document on your computer like a Google Doc. Then as you are asking your questions, write or type your answers into the document you have, so you don't have to rely on your memory.
Here are the state by state sales tax department's phone numbers for easy reference:
Alabama Sales Tax Phone Number: 334-242-1170
Arizona Sales Tax Phone Number: 602-255-3381
Arkansas Sales Tax Phone Number: 501-682-7104
California Sales Tax Phone Number: 800-400-7115
Colorado Sales Tax Phone Number: 303-238-7378
Connecticut Sales Tax Phone Number: 860-297-5962
District of Columbia Sales Tax Phone Number: 202-727-4829
Florida Sales Tax Phone Number: 850-488-6800
Georgia Sales Tax Phone Number: 877-423-6711
Hawaii Sales Tax Phone Number: 808-587-4242
Idaho Sales Tax Phone Number: 800-972-7660
Illinois Sales Tax Phone Number: 800-732-8866
Indiana Sales Tax Phone Number: 317-233-4015
Iowa Sales Tax Phone Number: 800-367-3388
Kansas Sales Tax Phone Number: 785-368-8222
Kentucky Sales Tax Phone Number: 502-564-5170
Louisiana Sales Tax Phone Number: 855-307-3893
Maine Sales Tax Phone Number: 207-624-9693
Maryland Sales Tax Phone Number: 800-638-2937
Massachusetts Sales Tax Phone Number: 617-887-6367
Michigan Sales Tax Phone Number: 517-335-7508
Minnesota Sales Tax Phone Number: 651-296-6181
Mississippi Sales Tax Phone Number: 601-923-7015
Missouri Sales Tax Phone Number: 573-751-4450
Nebraska Sales Tax Phone Number: 402‑471‑5729
Nevada Sales Tax Phone Number: 866-962-3707
New Jersey Sales Tax Phone Number: 609-292-6400
New Mexico Sales Tax Phone Number: 505-827-0832
New York Sales Tax Phone Number: 518-485-2889
North Carolina Sales Tax Phone Number: 877-252-3052
North Dakota Sales Tax Phone Number: 701-328-1246
Ohio Sales Tax Phone Number: 888-405-4039
Oklahoma Sales Tax Phone Number: 405-521-3160
Pennsylvania Sales Tax Phone Number: 717-787-1064
Rhode Island Sales Tax Phone Number: 401-574-8955
South Carolina Sales Tax Phone Number: 803-898-5000
South Dakota Sales Tax Phone Number: 800-829-9188
Tennessee Sales Tax Phone Number: 615-253-0600
Texas Sales Tax Phone Number: 800-252-5555
Utah Sales Tax Phone Number: 800-662-4335
Vermont Sales Tax Phone Number: 802-828-2551
Virginia Sales Tax Phone Number: 804-367-8037
Washington Sales Tax Phone Number: 800-647-7706
West Virginia Sales Tax Phone Number: 800-982-8297
Wisconsin Sales Tax Phone Number: 608-266-2776
Wyoming Sales Tax Phone Number: 307-777-5200