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You set up your ecommerce store and are open for business.
Thanks to adopting an automation platform, you’re reaching a broad audience and pulling in more sales. Email marketing and SMS conversion rates are in line with ecommerce merchant trends.
Business is great.
But what about legal obligations? Specifically, are you confident that you’re compliant with tax regulations, whether you’re selling a pair of pants to someone in New York or a car accessory to a Montana resident?
Violations can cost you and quickly derail your success. You may find yourself owing back taxes plus interest, and accruing other penalties.
Any company that sells items and products online is legally responsible for paying applicable ecommerce sales taxes. So how can you navigate the messy business of collecting sales tax in the U.S.? Read on for our overview on ecommerce sales tax.
What Is Ecommerce Sales Tax?
Sales tax is a percentage amount that any given state demands in return for selling goods within that state. Typically in the United States, it varies state-by-state, and is not included in the final price of the item (and is usually added at the end of the total purchase). This tax may vary depending on what kind of goods you sell, and while it was conceived for brick-and-mortar businesses, it is applicable to ecommerce as well.
Online businesses are responsible for collecting a tax on retail item sales, with the percentage dependent on where the buyer lives. That percentage, in some cases, might actually be zero.
When Do You Have to Pay Ecommerce Taxes?
“How does online sales tax work?” and “When should I pay sales tax?” are common questions among small business owners. Knowing when you have an obligation to pay tax is essential to remain on the correct side of the law. The good news is that there are certain criteria that you can use to establish whether you need to pay ecommerce taxes (although if in any doubt, always ask a professional).
In the United States, rules vary by state. Even if most of your business is conducted online, having a connection or a physical presence in a state generally means that you need to pay sales tax for that state. This is known as a “nexus” and can be determined by asking questions such as:
- Does your business have a physical presence in that state (office, warehouse building)?
- Do you employ workers in that state?
- Do you attend trade shows or events within that state?
Once the nexus has been established, it means that you are responsible for collecting sales tax and remitting payments to the state where you conduct your business. If you operate completely online and have no physical connection to a state, then it generally means that you are not required to collect or pay state sales tax (certain exceptions may apply). However, you need to monitor state laws and carefully to ensure you are capturing taxes where needed.
Tips For Managing Ecommerce Sales Tax
Once you determine the legal obligations for paying tax for your online business, you need to ensure taxes are collected and payments made according to legal requirements.
Understanding how online sales tax works is a process that typically follows these steps:
- Register for a sales tax permit in the appropriate state(s). If your business is operating primarily in America, it is illegal to collect sales tax in the majority of states without the correct permissions.
- Ensure that you have adequate systems in place to capture the necessary tax payments. Many online carts and marketplaces have built-in mechanisms to collect the tax. These can be adjusted to comply with the sales tax obligations for the country or state you are operating in.
- Collect the tax, report amounts, and remit payments in line with monthly, quarterly, or annual requirements.
As for making ecommerce tax payments, frequency can depend on the volume of sales. Payments are made monthly, quarterly, or yearly, based on your turnover.
Depending on your pricing strategy and the success of your business, the amount of ecommerce sales tax that you collect may fluctuate. Generally speaking, the more money you make, the faster the state will want its share!
Additional State Tax Rules and Legislation
Along with collecting and paying the appropriate amount of sales tax, ecommerce business owners need to be aware of other items.
While most states require collecting ecommerce sales tax payments, a few are exempt and some others have a reduced tax rate for specific items or none at all. It is important to check the tax laws of each state to ensure your online business is fully up to date with requirements.
Currently, states that are exempt from sales tax for online sales are:
- New Hampshire
There might still be a local sales tax, so it’s important to do your research.
Tracking Tax Legislation
Laws can change quickly, so as a business owner it is important to be knowledgeable of ecommerce tax law changes, especially when selling across state or country lines.
Monitor tax permits, reporting, and payment deadlines for changes. Working with professional accountants or attorneys can help you abide by legal obligations. Many sales software packages feature tracking and reporting tools to assist with ecommerce taxes.
For ecommerce business owners, tracking and reporting tax and other essential business processes is just as important as maintaining good customer relationships. Automating certain tasks, such as by marketing automation, can help free your time up for keeping up on sales tax compliance.
Omnisend integrates seamlessly with multiple ecommerce platforms to simplify and manage many sales and tracking functions so you can keep on top of your tax obligations. At the same time, its own powerful marketing analytics can be used to pinpoint new opportunities or areas of improvement.
Try Omnisend today with a free trial and learn how automation of ecommerce processes can alleviate your effort in generating online sales, giving you more time for challenges like ecommerce tax regulations.
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