Should States Charge Sales Tax To Online Business?

Most people are accustomed to sales tax—the percentage of tax that stores collect from customers in various states. If you have a store in a state that collects sales tax, you must add the state and local sales taxes to the bill amount, collect it, and transfer it to the local tax authority. If you sell your products online, you may or may not be needed to collect sales tax. If you're an online retailer trying to determine if you need to charge sales tax, first decide if your resident state has a sales tax at all. Many states impose sales taxes, but many like Alaska and Oregon don't.

Some towns and cities charge extra sales tax. For example, in California, in 2020, the state's sales tax rate was 7.25%, but local areas applied their individual additional sales taxes. A seller must understand the local tax rates and charge his/her customers accordingly. Many states that collect sales tax do not charge taxes on certain items like food.

When are you bound to collect sales tax online:

The primary rule for charging sales tax to online sales is:

If your business has a natural presence, or "nexus," in a specific state, you are required to collect sales taxes from online customers in that state.

If you do not have a natural presence, you usually do not have to collect sales tax on online sales. However, in June of 2018, the Supreme Court of the United States announced a ruling that will likely affect this exemption on sales tax collection. Businesses are supposed to collect sales taxes despite a natural presence in that specific state.

A physical presence means that you have some business office in that state. It could be any type of business enterprise, such as:

An office
A storefront
A warehouse

Should You Charge Sales Tax for E-commerce Sales?

As an online seller, if you are bound to pay sales tax in a state, it is your duty to collect sales tax from your buyers to pay the amount to the state.

Let's figure out when and from which customers online retailers need to collect an internet sales tax.

The fundamental rule for online sellers when handling sales tax is:

Your company has a sales tax nexus in the same state as your customer.
The goods are taxable in that state.

Let's examine these ideas a bit more in details:

Sales tax nexus - Sales tax nexus is a legal term that describes your business's connection to a state. If you, as an online seller, have nexus in a state, the state holds you responsible for charging sales tax to buyers in that state. You already have a sales tax nexus in your resident state. However, certain business activities create a sales tax nexus in other states too.

When do you have a sales tax nexus in different states:

A location: It can be an office, warehouse, store, or other physical presence of a business.
Inventory: Several states consider storing inventory in the state creates nexus, even if you have no other area of business or personnel.
Personnel: It talks about an employee, contractor, salesperson, installer, or any other person from that state working for your business.
A drop shipping relationship: If you have a third-party shipper shipping to your buyers, this may create a nexus.
Economic nexus: You exceed a state-mandated dollar value of sales in a state or conduct a certain state-mandated number of activities in a state.
Affiliates: People who promote your products in exchange for a com mission or a cut of the profits create nexus in multiple states.
Selling products at a trade show or other event: Some states establish a nexus, even if you only sell there provisionally during a trade show or an event.

Other E-commerce sales tax facts for online retailers that are essential:

Other than those mentioned above, the following are a few other intriguing things about sales tax.

Resale certificates - In many states, your sales tax license also serves as a resale license or seller's license. If you are involved in retail arbitrage, that is, buying products at retail prices to resell them, you are not required to collect and pay sales tax on those items if you give your resale certificate to a participating dealer. Note that retailers are not bound to accept your resale certificate. If you have a valid resale certificate from the retailer selling you items to resell, and he/she charges sales tax from you, you will usually be able to recover the sales tax thus paid on your next sales tax filing.

Note that resale certificates are useful only if you are truly planning to resell the items you bought. It is illegal to use your resale certificate to purchase items like packing supplies or office products, or items for domestic use. The state recognises this as fraud, and both you (reseller) and the retailer who sold items to you could be penalised or fined.

Periodic - sales tax check-ups - You should check your sales tax compliance from time to time. Business actions such as opening a location in another state, hiring an employee in a different state, making a certain amount of sales, or making a particular amount of sale events in a state may mean that you now have sales tax nexus in new states. TaxJar's Sales tax insights report will tell you if you are about to hit a threshold. On the other hand, you may also close a position or have an employee leave your company, suggesting that you no longer have nexus in that state. If your sales tax burden changes, renew your sales tax permits with each state and modernise your sales tax collection on various shopping carts and marketplaces. A periodic examination will ensure that you are fully sales tax compliant.

The nexus needed between state and seller:

The word nexus is used by the law to explain the connection retailers have with a distinct place where they are needed to collect and charge taxes for online sales.

Several states and courts interpret this connection differently. However, many recognise that if you have a store or an office in a state, you must collect and pay sales taxes in that state.

Various states uphold laws that describe eligibility factors, so be sure to start there. If you aren't sure whether you should have enough presence in a state for sales tax proposals, check with that state's taxing firm.

Selling across many states:

If you send inventory or stocks to a huge online company that distributes them to customers for you, you may have formed "connections" in many states in addition to your own.

For example, if you trade online from your place of business in California and don't have any business residence in other states, you have "nexus "—or a physical appearance—only in California.

But if you trade your commodities through Amazon's FBA program, Fulfilment by Amazon, you send goods to Amazon first. That connection needs you to obtain sales tax from consumers in other areas where Amazon does business.

Conclusion:

It is necessary to know how taxes affect your business and which tax software will be the best. For example, if you use a tax software like TaxJar, you can simply integrate your account with BigCommerce to automate filings, sales tax calculations, and reporting.

Also Read:

1) How to Prepare Your Business for Tax Season?
2) How To Reduce Your Taxable Income?
3) What Kind of Benefits do We Get by Paying Taxes in India?
4) What Is Lower Tax Deduction Certificate?
5) How Can You Claim Tax Exemption? What Can be Claimed Under 80c & Other Sections?