Ecommerce tax laws can be confusing to new or aspiring entrepreneurs. Being unsure how to collect and pay taxes for their online business has held many people back from starting their own store—after all, nobody wants to face the prospect of getting an angry letter from the IRS saying that you owe unexpected taxes. But don't despair: we've put together a quick overview of everything a beginner needs to know about how taxes affect your online business.
What tax laws should ecommerce businesses know about?
The main tax that ecommerce businesses need to worry about is sales tax. Ecommerce sales tax is a percentage of the sales price (before shipping costs), with the exact percentage varying by area. Ecommerce sales tax is comparable to the sales tax you pay in brick-and-mortar stores and, like any standard sales tax, is tacked on during the payment process. The entire amount of the sales tax is collected by the online merchant and then remitted (paid) to the government.
If you’re selling to shoppers in the U.S., you previously only had to worry about sales tax for online sales if you had established physical presence nexus in a state (i.e. a brick-and-mortar store, warehouse, inventory, or salespeople/representatives). But as of the South Dakota vs. Wayfair court case in 2018, ecommerce businesses now have to worry about economic nexus as well, meaning that if you sell products to customers living in a state that collects sales tax, you must collect and remit sales tax to that state as well once you hit a certain threshold of sales. You can learn more about economic nexus in our brief webinar with Avalara.
What are the sales tax laws for each state?
Sales tax laws vary by state. In the U.S., 45 states (plus Washington, D.C.; Puerto Rico, and different areas throughout Alaska) charge sales tax. Within some of these states, however, an extra sales tax might be imposed in certain counties, so that customers end up paying a "combined" sales tax. For example, in the city of Rhinebeck, New York, customers not only pay a state-imposed sales tax; they also pay an added Dutchess County rate, plus a small added tax that goes toward the area's mass transit system.
Economic nexus thresholds vary from state to state as well. In some areas, you will need to collect and remit sales tax if your business sells over $100,000 in a year; in others, the threshold can be $500,000 or be dependent on the number of transactions that occur. To find out about sales tax in a certain area you sell to, you can refer to one of the many state-by-state sales tax charts available online.
Are all items taxable?
Not all items require sales tax to be collected. Taxable items vary from state to state, which means that items that are tax-free in some areas may be subject to sales tax elsewhere. You'll need to check sales tax laws by state to find out if your products are taxable or not.
Should my business charge sales tax?
To determine whether ecommerce tax applies to your website, ask yourself the following questions:
1. Do I have physical presence nexus?
As we mentioned previously, physical presence nexus is just a fancy way of saying “significant presence in a state.” One rule of thumb: the rules of physical presence nexus will always apply to your home state. Other factors that determine physical presence nexus include:
- Having a physical store, office, or warehouse
- Having employees
- Having to store certain amounts of inventory (for example, requiring a warehouse for inventory storage)
- Having a third-party shipper or dropshipping contractor
- Selling at trade shows, markets, and other events
- Having a marketing affiliate who advertises your products for a commission
- Selling to customers who live there
2. Do I have economic nexus?
In many states if your revenues exceed around $100,000 a year (or 200 transactions), you have achieved economic nexus in that state and must pay sales tax. Be sure to check online for the latest economic nexus requirements in any states to which your store sells products, as they vary greatly.
3. Are the items I sell taxable in each state?
As mentioned before, whether or not an item is taxable can vary from state to state. For example, in many states, groceries and clothing aren't taxable (except for luxury clothing items). Likewise, medicines and health products, magazines, digital products (such as movies, music, and books), and textbooks/religious books are also tax-free in some states. To find out if the products you sell are taxable where you live, be sure to go online and check with that state’s tax laws.
Unfortunately, there's no getting around the fact that ecommerce taxes are complicated, and the taxes you owe will vary widely depending on what products are sold and where they're sold. That's why it's important to contact a tax or ecommerce business specialist to find out how ecommerce tax laws—and especially the new nexus laws—apply to your online business. Once you have the facts and know that you're in compliance with the latest regulations, you can start focusing on what's most important for your business—marketing and selling your products.
If you're new to selling online, Volusion makes handling the complicated issue of your ecommerce taxes easy with integrations like Avalara’s ecommerce tax services, which calculate sales taxes for you automatically by referencing up-to-date data on tax laws in each state. Learn how to add Avalara to your Volusion store in this article from our Help Center.