One thing every new online seller has to learn is how to collect and remit sales tax. Fortunately, we have a few tricks on how to automate this process, but let’s first take a look at the basics of sales tax for eCommerce sellers.
Forty-five U.S. states and Washington D.C. require merchants to charge a sales tax on goods sold in those states. Unlike income tax, sales tax is considered a “pass-through” tax since the merchant is only holding the taxes collected before remitting them to state and local taxing authorities. Each state has different rules and laws for sales tax, and keep in mind that sales tax rates can also vary by the county and/or city.
If you’re new to sales tax compliance it can seem overwhelming, but our five-step breakdown will give you the information you need to get started.
Step 1: Determine Where You Have Nexus
Sales tax nexus determines which states require your business to collect and remit sales taxes. Nexus is just a fancy way of saying a “significant presence” in a state.
You’ll always have sales tax nexus in your home state, but business activities like having a remote employee in another state, storing products in a warehouse in another state, or selling at a trade show in another state can cause you to have sales tax nexus in multiple states.
As an online seller, you are required to charge sales tax to customers from each state where you have nexus on all of your sales platforms. For example, let’s say you have nexus in North Carolina because you sell at a quarterly craft fair there. This means you must also collect sales tax from North Carolina customers when they make an order from your online store.
Step 2: Register for Sales Tax Permits in States Where You Have Nexus
Okay, now you’ve figured out the states where you have nexus and you’ll need to register for sales tax permits in each of those states. How? Follow these steps on how to register for a sales tax permit in every state.
Keep in mind that some states charge a small fee for a tax permit, but others are free. Also, some states require you to renew the permit periodically and others do not. You can always visit TaxJar’s sales tax resources for each state to find out what that state requires.
Each state will set you up with a filing frequency—usually monthly, quarterly, or annually—and you’ll find out the frequency when you receive your permit.
Keep in mind that you can’t legally collect sales tax from buyers in most states before you have received your permit. If you have any questions, check out our guide, “When to Register for a Sales Tax Permit” for a deep dive into this topic.
Step 3: Collect Sales Tax from Customers
Now that you’ve figured out where you have nexus and have received the sales tax permits for those states, the next step is collecting tax from customers in those states.
The rates can be confusing, especially in states that impose a county or city sales tax on top of the state tax rate. Fortunately, most online shopping carts and marketplaces allow you to automatically collect sales tax from your customers. You can read more about how to collect sales tax on all the common online sales channels here.
Step 4: Calculate How Much You Owe to Each State
I’ll be honest, this is the least fun part of the process. Manually tallying how much you’ve collected in taxes from customers in each state can be a major pain, especially if you have nexus in several states or sell on multiple platforms.
Most states further require that you break down this information into each sales tax district for that state, and some states will have hundreds of these. You’ll need to create a report from each sales channel and then find the tax rate for each sales tax district and apply it.
This is where having an automated solution like TaxJar is your best friend. TaxJar will integrate with your sales channels, calculate how much you’ve collected, and create your final report for each state. We can even automatically file your return in every state.
Step 5: Filing and Paying Your Sales Tax
At this point, you’ve already done the hard work and now you just need to file your returns and remit taxes collected to each state. Depending on the state, you will normally have a few options for filing:
- You can have TaxJar automatically file your return.
- You can file electronically for each state. You can find the website for each state’s department of revenue here.
You are required to file on or before the due date for each state. A late payment will frequently mean having to pay a penalty. Some states will actually give discounts for filing early or on time. Also know that most states require a ‘zero return’ so if you’re registered in one of those states you’ll need to file even if you didn’t collect any taxes for the filing period.
Once you’ve filed for each of your nexus states, you can sit back and relax for awhile, at least until your next batch of sales tax returns are due!
If this brief overview of the sales tax process was helpful but you need more information, check out our Sales Tax 101 for Online Sellers Guide for a deeper dive into the topics mentioned here. If you have any questions or comments about sales tax, start the conversation in the comments!
TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!