Does Your Online Store Need to Collect Sales Tax?

Entering the e-commerce space is easier than ever, thanks to leading platforms like Shopify. These platforms help anyone create an online store, and their systems take care of most of the heavy lifting. 

However, a digital store is a business, and the government will expect your online business to pay taxes, especially sales tax. 

Unfortunately, tax laws are still catching up to the digital space, so there is still much confusion regarding when and how to collect sales tax from online shoppers.

Even worse, sales tax procedures vary by state. Each government has its own deadlines and filing systems, and failing to file correctly can result in serious fines. 

What sales tax does a store need to collect?

There is no national sales tax in the United States. That said, since 45 U.S. states and Washington D.C. impose a sales tax, your store will likely owe a percentage of income to the government. 

State and local taxes

Tax amounts vary with each state. On the low end, Colorado only requires a 2.9% tax. On the high end, California requires a 7.25% tax. 

On top of this, local governments can add a percentage to the state sales tax rate. These additions can occur at the county and city level.  

Local taxes vary wildly from city to city. For example, the average local sales tax in Alabama is 5.22%, while the average rate in some states is 0%. 

See your state and local sales tax rates here.

Who has to pay sales tax?

Although most aspects of taxation are confusing, determining your sales tax liability is not that difficult. 

In plain terms, you only have to pay sales tax in states that you have established ties to through commerce. These ties are referred to as nexus. 

Nexus is a broad term that has no shared meaning across all fifty states. Each state has its own requirements, but all seek to accomplish the same goal: demonstrating that your business has developed enough of a connection with the state that it is eligible to be taxed.

If you have nexus, sales tax must be collected on transactions that occur within the state.

For example, if you have a warehouse, office, store, or other physical location, the local government can tax you for sales that occur in that area. 

However, if you are located in Pennsylvania and sell a t-shirt to someone in California, you do not owe California or Pennsylvania sales tax for that sale. 

What determines nexus? 

Each state has an established definition of nexus. Please check with your local taxing authorities if you believe you have nexus in that state.

Generally, nexus is determined by the following factors.

• Physical: An office, store, storage facility, or other physical location often triggers nexus.
• Affiliate: If you have resellers, influencers, or affiliates in other states, their activities could require paying sales tax there.
• Travel/Trade Shows: If your business sells on the road at trade shows or door-to-door, you could be on the hook for taxes where you visit.
• Employees: If your workers or contractors do business in another state, that could trigger nexus.
• Supplier: A relationship with a manufacturer or dropshipping supplier can carry tax implications.
• Economic: Some states require you to pay taxes after earning a specific dollar amount, even if you have no ties to that area.

Read this guide by Avalara to see nexus requirements in all 50 states and Washington D.C. 

How to collect sales tax on a website

Before selling anything online, you must ensure you collect tax correctly. If not, you face fines, debt collection, and other harsh penalties.

Step 1: Register for a sales tax permit

A sales tax permit allows you to sell products and services and pay taxes legally. Each state has different requirements for registering, but they generally include: 

• EIN 
• Business owner information
• Estimated yearly/quarterly/monthly tax liability or gross sales
• Business address/mailing address

Read this guide from TaxJar to see how to register for a sales tax permit in your state.

Step 2: Determine who to collect from

Your online store only needs to collect taxes in an area where you have nexus. 

After making a list of every state where you must collect taxes, add each location to your e-commerce website. If you use a platform like Shopify, this is relatively straightforward. 

These platforms usually have a Tax section within settings. Here, you can list the states you must collect sales tax from, adjust tax rates, and account for any legal matters that might affect your tax collection. 

Your website will then collect tax when a customer enters their shipping and billing address. When taxes are due, you can use your website’s reporting tools to calculate your tax liability and double-check for errors. If you work with an accountant, you can export your tax report and send it to them for easier processing.

Important note: Most states use the shipping address as the basis for sales tax. Meaning, if someone’s billing address is in New York, but their shipping address is in Pennsylvania, you will collect Pennsylvania’s sales tax rate. 

This is an example of Origin vs. Destination sales tax. You can get a better understanding of this topic in this guide from Avalara.

Step 3: Report and pay

Each state has specific rules regarding how frequently to pay sales taxes. 

Typically, you either have to submit taxes monthly, quarterly, semiannually, or annually. Filing frequency is often determined by earnings and tax collected.

For example, here are Florida’s filing requirements:

After determining your filing deadline, make sure you double-check your total tax liability. While your website may track all sales accurately, you should export the report and ensure you are not missing any sales. 

Likewise, you do not want to inflate your tax liability by including gross sales. Not all sales are taxable, but many people mistakenly pay too much by failing to exclude these transactions. 

Tip: Since this process can be confusing, it may help to use a tool like TaxJar to help calculate your total sales tax liability without any headache.

Once you are ready to file, visit your state’s tax website and submit the payment! 

Choose a POS that manages online and physical stores

Operating an e-commerce business and navigating taxes can be stressful. Add in a physical store, and now you are virtually running two businesses. Reporting errors are likely, especially if your sales and inventory are tracked in separate places. 

Luckily, the Epos Now Retail point of sale system is here to help. With a modern POS, you can synchronize your website and physical store for complete convenience. 

For example, when you add a product to your physical inventory, you can also list it on your e-commerce website. Also, any sales you make online are logged in your POS, so you don’t have to download and upload spreadsheets of data. 

Best of all, Epos Now systems integrated with over 100 applications to help you do business. 

With programs like QuickBooks and Xero, your system seamlessly imports sales data to your accounting software for simplified reporting. When tax time comes, its only takes a few clicks to get reports and see taxable transactions.

Simplify your tax reporting today. Call now to speak with a POS consultant.