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. However, don't despair - we've put together a quick overview of everything a beginner needs to know about ecommerce taxes and how it affects your online business.
What is Ecommerce Tax?
Ecommerce tax refers to the sales tax that's charged on merchandise sold online. Ecommerce sales tax is a percentage of the sales price (before shipping costs), with the exact percentage varying by state. 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 state government.
What Are the State Sales Tax Laws Where You Live?
Ecommerce sales tax laws vary by state. In the US, 45 states (plus Washington, DC), have a 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 Duchess County rate, plus a tiny added tax that goes toward the area's mass transit system.
It's important to remember that sales tax has nothing to do with the federal government — it's imposed and governed by the state. To find out about sales tax in your area, you can visit 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 your <a href="https://www.taxadmin.org/state-tax-agencies" target="_blank"> state sales tax laws</a> to find out if your products are taxable or not.
Should my business charge sales tax?
So far, we've been referring to sales taxes in general; but now it's time to be more specific concerning ecommerce tax. In order to find out whether ecommerce tax applies to your website, ask yourself the following questions:
1. Do you have sales tax nexus?
A sales tax nexus is just a fancy way of saying 'significant presence in a state'. In other words, if your business has a 'significant presence' within a state, you're likely to have sales tax nexus status in that state, meaning you'll have to pay taxes within that state.
Factors that determine ecommerce sales tax 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 drop shipping contractor
• Selling at trade shows, markets and other events
• Having a marketing affiliate who advertises your products for a commission
Additionally, in many states if your revenues exceed around $100,000 a year (or 200 transactions), you have sales tax nexus. Known as "economic nexus," this is a new law that just went into effect in June, 2018.
Like most tax laws, economic nexus laws can vary in each state, so be sure to check online for the latest economic nexus requirements in any states in which your business has a significant presence.
One rule of thumb: The rules of sales tax nexus will always apply to your home state. However, you can also have a sales tax nexus in other states by various ways, such as having a physical store or inventory warehouse in another state, or by setting up (even only once in a while) at out-of-state markets and trade shows.
2. Are the Items You Sell Taxable in Your 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 your state tax laws.
Important New Nexus Tax Laws
As of July 2018, states can now require sales tax if you sell to customers in their state, even if you don't have nexus in that state. This completely overhauls everything for online sellers, as it means that items you sell to someone in another state could be taxable.
In addition, the same regulations apply if you sell through a large, third-party online vendor such as Amazon. For example, if you sell your products through Amazon's fulfillment program, you're now required to collect ecommerce tax from customers in states where these taxes will apply.
This new tax law applies to everyone who has an online ecommerce store, whether it's through a privately-owned website or through a third-party vendor such as Amazon or Etsy.
Unfortunately, there's just 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. If you're <a href="https://www.volusion.com/sell-products-online" target="_blank">new to selling online</a>, Volusion makes handling the complicated issue of your ecommerce taxes easy with automatic integrations like <a href="https://www.volusion.com/marketplace/1800accountant/"ecommerce tax services</a>, which will prepare and file your ecommerce taxes for you automatically, as well as let you speak with expert accountants about any tax questions you may have.
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.
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