Before the eCommerce boom, a business only had to pay sales tax on the products it sold, and that too only where the business was physically located. However, this has changed since a 2018 Supreme Court ruling requiring businesses to also pay sales tax in the state they ship their products. This article will guide you about setting up your eCommerce sales tax in easy steps. But first, let’s see what an eCommerce sales tax is!
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eCommerce Sales Tax – An Overview
An eCommerce sales tax is the tax levied by the government on products sold by a business online. The business is responsible for collecting the eCommerce sales tax from customers at the time of purchase and paying it in the relevant state. The eCommerce sales tax depends on the product’s price because it is calculated as a percentage.
Who Pays the eCommerce Sales Tax?
The customer buying a product online pays the eCommerce sales tax. When someone makes a purchase, they pay the tax in a lump sum. However, the eCommerce brand is responsible for collecting this tax from the customer and filing it with the relevant authority.
Steps to Setup eCommerce Sales Tax
An online business is more likely to get audited as its operations and sales grow. Therefore, an online brand must set up its eCommerce sales tax and prioritize compliance. Doing it manually can be quite complicated, but an eCommerce sales tax software can make this difficult task simple for you.
Step 1: Determine Your Sales Nexus
There are two ways an online sale can be taxed. The first is origin-sourced sales tax, which means the sale is taxed where the business is located. The second is destination-sourced sales tax, meaning taxing the business at the location where it ships its product. It is easier to keep track of origin-based sourcing since a company is only taxed in the state it is based in.
Step 2: Registration with the Department of Revenue
After confirming the sales tax nexus, the next step is registering with the concerned revenue department. You can register online in almost all states; however, the application cost varies from state to state.
Step 3: Getting Your Sales Tax Permit
Once the taxation authority completes processing your application, it will issue you a sales tax permit. This permit means you can now collect sales tax on the products you sell online. The sales permits have different expiration dates in different states. For example, in Arizona, the permit expires only after you request its cancellation. Whereas, in Colorado, a sales tax permit expires in two years and you must renew it.
Step 4: Sales Tax Exemptions
There are specific products, situations, and times when a business doesn’t have to pay sales tax. You should know about these exemptions to avoid paying more than you owe. For example, nonprofit organizations (NGOs) can make purchases without paying sales tax in some states like Virginia. Similarly, New Mexico and some other states give sales tax holidays during the back-to-school season to reduce school supplies and clothing prices.
Step 5: Collection and Filing of Sales Tax Returns
You can start collecting eCommerce sales soon after registering with the revenue department and getting your permit. Once your online store starts collecting sales tax, you must file it with the concerned department.
Every state has different requirements for businesses to file sales tax returns. Sales volume also determines how frequently you have to report the collected tax. For example, in North Carolina, a business needs to file for sales quarterly if the monthly tax liability is below $100. However, the sales tax must be filed monthly for a monthly liability between $100 and $20,000.
Step 6: Creating a Schedule for Sales Tax Returns
The states also define the deadlines businesses must follow when filing their eCommerce sales tax returns. For example, Missouri requires businesses to file their monthly sales tax returns on the last day of the month and quarterly returns on the last day of the first month after a quarter ends. The annual returns need to be filed by 31 January.
Step 7: Automation of Sales Tax Bookkeeping and Payments
Several businesses file their sales tax returns with the government manually. However, this method isn’t sustainable in the long run, especially when your sales and operations grow. There are more than 12,000 tax jurisdictions in the United States. Imagine filing your eCommerce sales tax returns in all 50 states! It might take you dozens of hours, even if you have help.
You can easily avoid this hassle by using an eCommerce sales tax software to automate everything from collection to filing sales tax returns across the United States.
Conclusion
A business selling products online needs to collect eCommerce sales tax from customers and file it with the government. Keeping track of sales tax collection, reporting, and filing is complex because every state has different taxation laws. This requires one’s full attention to avoid penalties and fines. However, businesses can automate this whole process with the help of an eCommerce sales tax software!
