If you’re an e-commerce veteran, you’ve probably earned your sales tax stripes. You understand how to calculate and collect the correct sales tax on each shopping cart transaction. You’ve got a decent grasp on the varying tax rates and taxability rules in your home state. You might even be able to tick off tax rates in other states — giving yourself a good chance of winning Sales Tax Jeopardy!, or of avoiding problems with Uncle Sam.
But if you’re an e-commerce newbie, you might be struggling to come to grips with all this sales tax stuff. It’s tricky. So here’s a primer.
Sales tax is a percentage tacked on to the price of a product. This amount goes to your state, county or local area to pay for things like schools, roads and fire departments. And you, as the merchant, are required to collect sales tax from buyers and remit it to the government.
Here are 10 things you must absolutely know about sales tax:
1. States with sales tax
Forty-five states and the District of Columbia require merchants to collect sales tax on taxable items. If you live in Alaska, Delaware, Montana, New Hampshire or Oregon, you’re in luck; your state doesn’t levy a sales tax. That said, some local areas even in those states may have a sales tax, so always check with your tax professional for advice.
2. Sales tax rules vary by state
Sales tax rules and regulations are governed by states and local authorities. Because of this, there are very few “general rules” about sales tax. Be ready to get intimately familiar with sales tax rules and regulations in every state where you have “sales tax nexus.”
3. “Sales tax nexus”
Get to know this phrase because it will determine from which customers you must collect sales tax. If you live and operate your business in a state, then you likely have sales tax nexus (i.e. presence) in that state, and that means you must collect sales tax from buyers in your state.
4. But wait… more about sales tax nexus
You may have sales tax nexus in more than one state. Most states (and they’re all different, remember) consider having a presence such as an office, employee or even items stored in another state as “nexus.” If you find you have nexus in more than one state, then you’re likely required to collect sales tax from buyers in all states where you have a presence.
5. Sales tax rates
States set a sales tax rate (generally from four to seven percent) and then local areas can add on additional rates. For example, the sales tax rate in Avondale, Ariz., is 8.80 percent. This is comprised of the Arizona state rate of 5.6 percent, the Maricopa County rate of .07 percent, and the Avondale local rate of 2.5 percent.
6. How much sales tax to collect
You must collect sales tax on the percentage of a sale price of taxable items. Most items you sell will be taxable, but some states may exempt or discount items such as food products. Always check with your state’s Department of Revenue or other taxing authority if you have a question about the taxability of an item you sell.
7. Origin-based vs. destination-based sales tax states
Some states require you to collect sales tax based on where you are located (origin-based sales tax collection), and some require you to collect sales tax based on where your buyer’s ship-to address is located (destination-based sales tax collection.) You’ll need to find this out before you can collect the correct amount of sales tax in a given state.
8. You must register to collect sales tax
You must apply with your state for a sales tax permit before you begin collecting sales tax from customers. Most states consider it unlawful if you collect sales tax without first registering with their taxing authority for a sales tax permit.
9. Remitting sales tax
When you apply for your sales tax permit, your state will tell you when you should file a sales tax return and remit the sales tax you’ve collected back to your state. This will generally be either monthly, quarterly or annually and often depends on the amount of revenue your business brings in or the amount of sales tax you routinely collect.
10. Zero returns
Once you are registered with a state, be sure that you file a sales tax return, even if you didn’t collect sales tax in a state in a taxable period. Many states will charge you a penalty (of $50, or even more!) if you don’t file a sales tax return, even if you don’t owe any sales tax.
GD Online Store makes sales tax easy
And that’s just the tip of the iceberg when it comes to facts you need to know about sales tax — unless you’re running a GoDaddy Online Store. While it won’t hurt to stay educated, our new partnership with Avalara makes managing sales tax simpler.
“Tracking and calculating taxes can be one of the more tedious aspects to deal with while running an online store. Our partnership with Avalara will allow GoDaddy Online Store customers to easily manage and remain up-to-date on increasingly complicated tax regulations, saving time and helping them focus on growing their business.” ~ Sandeep Grover, head of product, Presence and Commerce at GoDaddy
GoDaddy Online Store provides a simple way for small businesses to get started selling online, and this partnership with Avalara will help Online Store users with quick, accurate sales tax calculations for every purchase. GoDaddy Online Store customers will further benefit from reporting and easy sales tax filing for small businesses. By eliminating the complexities of calculating taxes, tax filing, and tax reporting, small businesses and e-commerce entrepreneurs can focus on growing their ventures and servicing customers.
And that’s worth wagering it all in Final Jeopardy!
Also published on Medium.