E-commerce provides businesses with access to much larger markets, but it also complicates even the simplest of retail transactions. One of the most challenging aspects can be figuring out which sales taxes apply to individual sales, especially when you're selling to out-of-state customers.
This article will provide an overview of when you should collect sales taxes for out-of-state sales. Learn how to keep track of everything along the way.
Key Takeaways
- For retailers who sell their goods online, all orders and deliveries within the state are subject to that state's sales tax.
- You would typically only collect sales tax for another state if you have a physical presence or "sales tax nexus" in that state.
- Online retailers are responsible for knowing how to tax their shipments, but many e-commerce platforms handle this detail automatically.
- Keeping accurate and detailed records of your sales will be helpful, especially as many states require yearly or even monthly accounting.
When to Charge Your Own State's Sales Tax
As a business owner, you would generally collect your own state's sales tax on orders placed from within your own state or delivered there. You should not collect local sales tax on out-of-state orders in most states.
For example, Massachusetts charges its sales tax when the purchaser does any of the following:
- Picks up the item in Massachusetts
- Has the item delivered to a Massachusetts address
- Places their order while in Massachusetts
You would not collect your own state's sales tax if your out-of-state buyer places an order using their computer at home in another state for delivery there. To keep track of the details, keep the charged sales tax funds in separate accounts for each state, and set up automatic sales tax payments to each required state.
Note
If your tax situation is particularly complicated, consult a professional accountant, CPA, bookkeeper, or outsourced accounting service to track sales taxes and ensure that they're collected accurately.
What About Local Taxes?
Many states collect both a statewide sales tax and local city or county sales taxes as well. You must collect all applicable taxes, and you should generally collect the sales tax rate that applies at the location of the sale. This will depend on the state. California, for example, follows this rule, with sales taxes being collected at both a statewide and local level.
When to Charge Another State's Tax
You would typically collect sales tax for another state only if you have a physical presence in that state. In legal terms, this is known as having a "sales tax nexus" there.
Your physical presence might be a retail store, a warehouse, or a corporate office, even if the facility is not open to the public. Entering into an affiliate agreement with a resident of the state may also establish a physical presence or nexus there, in some states.
If you do business at your customer's locations, check with your tax advisor as to whether traveling to a state and conducting business there would create nexus. This might cause that state's sales tax rules to go into effect.
How to Determine the Location of Online Sales
Online sales can complicate sales tax rules. A retail transaction that takes place entirely online is sometimes taxed according to the shipping address, depending on the state.
States presume that online orders are physically placed from the shipping address with the intent to use the item at the shipping address. When it comes to online sales, make sure that you read the rules for the specific states in which you do business.
How to Keep Track of Tax Rates
You're responsible for collecting the correct and current sales tax rate on all sales that require that you collect sales tax. Sales tax rates can change at virtually any time with different rates in each state, county, and city, so it's important to keep on top of them. Each state usually has an online database with current sales tax rates.
Most e-commerce platforms look up the customer's address automatically and charge the applicable tax rate. You're only responsible for selecting the jurisdictions for which you must collect the taxes.
Note
Make sure that your technology providers update sales tax rates in real time to ensure that your tax rates remain compliant. With current accounting technology, it's easier than ever to leverage systems and make sure you're current with rates.
What to Do With the Taxes You Collect
You must send the sales taxes that you charge to the appropriate state, which is why it is important to keep detailed records of your transactions. Many states, such as Michigan, require that you submit monthly sales tax returns when you make a payment.
In this case, you are collecting the tax directly from the consumer and segregating it in its separate business bank account, so you wouldn't consider it to be part of your income.
Note
Failing to pay the correct amount in full and on time is a serious offense, and it could lead to losing the right to do business within the state, as well as hefty fines.
Frequently Asked Questions (FAQs)
What happens if you don't collect sales tax?
If you fail to collect sales tax for a state in which you're responsible for collecting it, you still owe the tax. State and local tax authorities will seek to collect past taxes you should have collected, and they may charge you interest or other penalties on the past-due balance.
How do I register to collect state sales tax?
You need to register your business with any state for which you'll be collecting sales tax. To learn how to register, contact the state's department of revenue or other tax authority. Be sure to have business information available, including your employer identification number, business address, and banking information if you plan to pay sales tax electronically.
How much do you need to sell before you collect sales tax?
Some states have exemptions for total sales below a certain amount. Check with any states where you have a business nexus, to determine when you need to begin collecting sales tax.
