Understanding your online sales tax obligations is challenging. Unlike a physical shop with more straightforward compliance requirements, online sellers have to be aware of sales tax laws in all the states and cities where their customers are located.

For example, say your business is located in Texas, but you are selling online to customers in New York, Michigan and California. Now you not only have to worry about your tax obligations in Texas but three additional states as well.

We’ll explain in this quick guide what you need to know about online sales tax, including when you need to collect tax from your online store.

What’s in this article?

• Online sales tax 101
  
• Do you need to collect sales tax from online sales?
  
• How to be tax compliant as an online seller
  

Online sales tax 101

States and local governments use sales tax to pay for projects such as schools, roads and public safety. Sales tax is a type of indirect tax because it is collected by the business or online retailer on behalf of the government.

Sales tax is governed at the state level, which means that each state creates its own tax laws. This is part of the reason that online sales tax compliance is so complex. For an e-commerce business selling in multiple states, it must be aware of all the different sales tax laws and keep up with when sales tax is due in each state.

Do you need to collect sales tax from online sales?

Online businesses are required to collect sales tax from customers when they exceed certain thresholds. These thresholds are referred to as "economic nexus thresholds", and they are either revenue or transaction based or both. For example, in the state of Georgia, businesses only need to collect sales tax from customers if they have exceeded US$100,000 in revenue or 200 transactions from customers in Georgia. Certain states only have revenue thresholds or require businesses to exceed both the revenue and transaction thresholds before collecting sales tax. These thresholds vary from state to state.

In addition, businesses can reach a nexus threshold by having a physical presence in a state. This is referred to as physical nexus, and it can be created by having an office space, remote employees or a warehouse in a state. In general, if your inventory is being stored in a state, you are likely to create sales tax obligations in that state. Selling online from your home can also create physical nexus in a state.

However, just because you have met a nexus threshold in a state does not mean that you are required to collect sales tax. Not all goods and services are taxable – and if the items that you are selling are not taxable, then you are not required to collect sales tax on those items. It’s important to keep in mind that tax laws change often, and state governments can change how products and services are taxed throughout the year.

In addition, to avoid double taxation, many business-to-business purchases are tax-exempt. If a business purchases an item specifically to resell it, they can use a resale certificate to avoid paying sales tax on the item because they will charge sales tax to the end customer.

How to be tax compliant as an online seller

If you find yourself with sales tax obligations, you need to register for a sales tax permit before collecting tax from your customers. You must register individually with each state once you meet the registration requirements, such as exceeding an economic nexus threshold or having a physical location in a state. Certain states may also require registration at the local level. To register for a sales tax permit, you’ll need general business information, and certain states charge a small fee for registering. Registration is done online, and you can find the registration links here.

Once you have collected sales tax from your customers, you will need to file a sales tax return and remit the sales tax that you collected to the correct state or other local tax authority. Each state tax authority’s website will have details on how to file and your due date. Due dates vary from state to state, and the frequency in which you file a return may also vary. Large businesses with a higher tax liability will often file more frequently (monthly), and smaller businesses might only be required to file bimonthly or quarterly returns. Filing on time is the best way to avoid the penalties and interest that come with a late filing.

Even if you have not collected sales tax during a reporting period, you may still need to file a return. These are called "zero returns", and while you will not remit any tax to the state, you are still required to file a return.