A Guide To Collecting US Sales Tax For E-Commerce Stores

Collecting taxes is always the bane of every entrepreneur’s life. Accountants can take care of most of the small details, but nevertheless, a company still needs to keep its books in order if they are going to stay on the right side of the government.

One of those taxes is sales taxes. If you sell something online, then sales taxes need to be applied. Not doing so can land you in hot water and a huge fine, when the state government finally catches up with you.

Therefore I thought it would be beneficial to talk to someone who is an expert in this area. I turned to Teddy Tehrani, who works for Sovos Compliance. He was kind enough to write a guest article for us on this very subject.

Introduction

Successfully growing your business brings new challenges and hiccups. As your business continues to expand, your processes will need to change. One potential hurdle facing your online business is obeying sales tax obligations. As your company expands its presence beyond your home state, it’s important to be aware of your sales tax liability, and how to manage it.

This post will cover the basics on making sure your online business remains compliant as you expand into new markets. You’ll learn how collecting and paying sales tax can be automated so you can focus on the daily management of your business.

What Is Nexus & How Does It Affect My Business?

As you begin to sell your goods and services into other states, you will need to determine whether or not you have nexus (tax liability) in those states.

Nexus is simply a way of saying that you have enough of a presence in a state to owe sales tax there. But just because you sell into those states does not mean that you necessarily have nexus. So how do you find out for sure?

This page breaks the issue down, but two common examples of nexus are:

• Storing your products or attending a trade show in a state other than where you are based.
• Having an employee or contractor in a state other than where you are based.

Local and state governments are paying more attention to the amount of uncollected tax revenue from out of state businesses that have a sales tax obligation. As your business expands, it’s important to remain compliant to avoid any fines or penalties.

Another reason to stay on the right side of the law is preparing for prospective buyers of your business to complete their due diligence inspections. With sales tax becoming more of a hot topic and a major concern for potential buyers of online business’ it’s important to properly collect and report these taxes. In one instance, not reporting on sales tax cost a business owner $70,000 when they went to sell their business.

Get a Sales Tax License & Collect!

After determining which states you have nexus in, you now need to obtain a sales tax license for those states. Each state has its own rules and procedures for obtaining licenses, but a simple Internet search of “(state) sales tax license application” will direct you to the right place.

For more information and state-specific links, take a look at the Taxify blog series “How To File In…” The good news is that states want to collect tax, so they generally make obtaining a license easy and painless.

Once you have your license, you are ready to start collecting sales tax. Determining rates and when to charge tax can be very challenging. Many online shopping-cart software providers are automatically programmed to calculate sales tax totals at checkout based on the customer’s location.

While online shopping carts handle the calculation, they do not report or file taxes for you. That is your responsibility. If you are collecting sales tax but not paying it to the state government, you can get in big trouble.

Automating Compliance

If you are using an online platform to collect sales tax, most will offer some form of sales report. This report will break down everything that has been processed through your store. Unfortunately, many states require additional information than what these tools usually provide.

The information which you need to report on varies by state. These extra reporting requirements can be confusing and time-consuming, sifting through paperwork in order to file correctly. Regardless of how you generate your reports, you must file and pay in all states where you have nexus.

There are three ways to manage filing the sales tax you collect :

• You can manage it yourself.
• You can outsource it.
• Or you can automate it with a sales tax compliance software such as Taxify.

What Do You Do As An Amazon Seller?

If you sell on Amazon, the steps are similar. First, you need to determine where you have nexus. For “Fulfillment by Amazon” customers, you have nexus in any state where your product is being warehoused.

To know where your products are being warehoused, you have a few different options:

• Download the Inventory Detail Report from your Seller Central account to find out which states your products are being stored in.
• Pay for a service like Wherestock to tell you where your items are being stored.
• Start a 30-day Taxify trial which will identify where your inventory is being stored for FREE.

Taxify has put together this Sales Tax Guide for Amazon Sellers to walk you through the steps.

While collecting and remitting sales tax can be done manually, automating the process will free up your time to manage your business. Also, if you’re considering selling your business, having your sales tax records in one central location will ensure a smooth sale.

Disclaimer: While Taxify knows a lot about sales tax, we’re not CPAs. To get in-depth advice for your business, check with your CPA, bookkeeper, or attorney after reading this guide to get advice about your specific situation.

Teddy Tehrani is a member of the Sovos marketing team, focusing on helping small businesses better manage business to government compliance. In addition to being a marketing enthusiast, he is passionate about skiing and the outdoors.