What Is Ecommerce Sales Tax?
Ecommerce sales tax is a mandatory tax imposed by state and local governments on online transactions. This tax ensures that all businesses contribute to the community infrastructures that make buying online possible. Brick-and-mortar businesses, by default, pay sales taxes in the communities where they physically exist. However, because it’s much easier for an ecommerce business to sell across local and state lines, commerce sales tax requirements were established.
Importance of Ecommerce Sales Tax
Your business needs to understand and comply with commerce sales tax regulations, which vary by state. Doing so can help you avoid legal penalties but also foster trust with customers who expect transparency in pricing. State and Local Tax Planning (SALT) is an essential part of running an ecommerce business.
How Does Sales Tax Work When Selling Online?
Sales tax within the ecommerce space is determined by the “nexus” concept. This refers to your business’ connection to a state that requires the collection and remittance of sales taxes. Nexus most often occurs because of your physical presence in an area, and this alone defined nexus before tax codes were updated.
For example, you’re headquartered in a certain state and may have satellites, salespeople, or employees in other states, which could establish a physical presence in those states. However, as ecommerce became more prevalent, states had to rethink how their existing definition hindered their ability to collect adequate taxes.
If you were to sell only $5,000 worth of goods annually in a state where you do not have a physical location, the lost tax revenues for that state would hardly make a dent, so most states have a higher threshold at which they consider you to have a business nexus there. However, if you sell $100,000 or $50,000 worth of goods, the state would see a shift toward more substantial lost tax revenue as more and more consumers choose to buy online.
When Should Sales Tax be Collected?
You begin collecting sales tax for a state after you register to collect taxes in that state. Some states give you months to do this, while others expect you to do this the “same day” you reach nexus. If you sell to people in another state, it’s essential for you to know what the threshold for business nexus is in every state where you do business and when a new threshold is on the horizon, especially in those “same day” states.
Yes, every state is different, and you need to keep up with this threshold for all 50 states.
Once you establish a business nexus in a state, it generally exists going forward, depending on the state. This means that once you meet the criteria for economic nexus—whether through sales volume, transaction count, or physical presence—you are expected to continue collecting and remitting sales tax in that state indefinitely.
However, if there are significant changes in your business operations, such as a drastic reduction in sales or ceasing physical operations in that state, you may no longer meet the nexus criteria. In such cases, you might need to review whether you still have a nexus and potentially deregister for sales tax if applicable. In most cases, filing your final tax return in that state amounts to “deregistration”. But you should review the guidelines for the state however unlikely this situation is to occur.
It’s important to regularly monitor your sales activities and consult with tax professionals to ensure ongoing compliance with state laws, as tax regulations can also change over time. Our experienced CPA experts can also help you manage interstate taxation and take advantage of State Tax Credits and Incentives for Business Expansion that can work in your favor.
Prioritize Sales Tax Compliance
This isn’t a situation where you wait for a state where you have established a new nexus to contact you about last quarter’s e-commerce sales tax. They won’t let you off the hook because you say you did not know. In fact, they may not contact you at all until some time later after costly penalties have piled up. For these reasons, you should get ahead of this and review where you’re doing business and how each state defines a business nexus.
Economic Nexus & Online Sales
Because nexus can occur through either physical presence or economic presence, the term “economic nexus” exists. This nexus is based on your sales volume and/or sales revenues in each state. If your business achieves an economic nexus, you may be required to immediately start collecting taxes.
You are expected to have the systems in place to do for that state. Clearly, this can become a challenge for small and medium businesses alike. You now need the technology and procedures to collect sales taxes in the correct percentages for some customers and not others.
To this end, you must keep track of sales and revenues by state and have a method to alert yourself and responsible employees when one of the state’s economic nexus thresholds has been reached. Of course, these days, much of this can be automated. With advanced point-of-sale systems, you can begin collecting sales tax at the right time. However, automation must be in place so this doesn’t happen.
But even with automation, ecommerce sales Tax Planning can get complicated.
Click-Through Nexus
A click-through nexus exists when you earn sales through customers clicking links on someone else’s website. That could be a review site, blogger, influencer, online publication, or affiliate marketer.
For example, you may have partnerships with affiliate marketers who earn a commission when they send traffic through to your website or an online magazine that drives traffic to your site. The affiliate may be in one state, while the person who clicked their affiliate link to visit your website is in a different state. This setup potentially creates a nexus in two states.
That’s not to say you have to collect or remit sales taxes for two states on a single transaction. However, you may now be responsible for collecting tax on all customers whose ship-to address is in the state where the affiliate is located. This applies even if the sale wasn’t directly generated by that affiliate but by another source.
A click-through nexus can similarly arise if you use influencer marketing strategies. For example, you might pay an influencer to share your product link with their followers in a social media post. As a result, you receive a surge in sales, which you can track using the code you provided to the influencer. While the ship-to address determines where the sale is allocated, the presence of the influencer may establish a nexus for you in their state. This means that you could be required to collect and remit sales tax for all customers with a ship-to address in the influencer’s state, even if the sale wasn’t directly generated by that influencer.
For this reason, it’s critical to track where your website traffic is coming from. Additionally, when establishing these kinds of partnerships, consider how they may create additional tax obligations. For example, if you’re located in Chicago and prefer to avoid remitting sales taxes to California due to its local tax requirements, you might be selective in partnering with influencers there—provided your total sales in California do not exceed the state’s economic nexus threshold.
Affiliate Nexus
In truth, a click-through nexus is a type of affiliate nexus. The distinction is that an affiliate doesn’t have to be an “online affiliate”. An affiliate could be a contract door-to-door salesperson or people you pay to organize an event.
Let’s say it was a massive event, and people came from all over the country to attend. Regardless of where these customers were when they actually hit “buy now”, you have potentially created an affiliate nexus in the hosting state. Any sales that event generated may count toward the nexus threshold.
This might influence your decision to host the event in one state rather than another to avoid establishing a nexus there.
The Role of the Marketplace Facilitator in Ecommerce Sales Tax
Marketplace facilitators include ecommerce platforms like eBay, Etsy, Amazon, Walmart Marketplace, Wayfair, and Shopify, among many others. Generally speaking, marketplace facilitators are required to collect and remit sales tax on sales made through their platform, regardless of whether the individual sellers on the platform have established their own nexus in the state where the transaction occurs. In most states, you exclude these registered marketplace sales when determining if you have an economic nexus. They’re already accounted for.
This requirement reduces the administrative burden on small businesses that might otherwise struggle with the complexities of multi-state sales tax compliance. It also streamlines tax collection for the states. They must work with eBay, not its million+ sellers individually.
If you sell on these platforms as part of your e-commerce business model, your customers are paying sales tax on every transaction in accordance with their state’s rate. However, if those same customers purchase through your website, they may not be subject to tax unless your sales in their state exceed the nexus thresholds.
Furthermore, if you utilize Amazon’s Fulfillment by Amazon (FBA) service, where they store inventory on your behalf, this could establish a nexus in the states where your products are warehoused. Because Amazon may distribute your inventory across multiple locations, this physical presence may require you to collect and remit sales tax in those states.
Additionally, if you sell from your website, you take on the responsibility of remitting sales taxes to a state once you have a nexus there. It’s essential for business owners to understand how to navigate ecommerce sales tax, even if they don’t handle their own accounting. You could also work with a business advisor who can help you make these decisions based on their state and local tax expertise.
For example, if you were tired of paying high eBay seller fees and considering shifting from marketplace selling to your own website, you would need to know the pros and cons of making this move.
Register for a Sales Tax Permit
Once you identify a nexus in a new state, your next step is to register for a sales tax permit. The process is straightforward, and you can often do it online. Complete this process before you begin collecting taxes to avoid running into potential issues with tax authorities. This requires some timing, so you need to track each state to be aware of an approaching nexus for ecommerce sales tax.
Understand the Unique Tax Rules for Each State
As we’ve seen, navigating ecommerce sales tax comes down to understanding the nexus rules for 50 states. However, it’s still crucial to look more closely at individual state requirements as your business establishes a nexus there.
| State | Sales Threshold | Transaction Threshold | Exceptions and Clarifications | Registration Requirements | marketplace included |
| Alabama | $250000 per year | None specified | Includes taxable and tax-exempt sales. | Jan 1 following nexus | No |
| Alaska | Varies by jurisdiction | None specified | Local jurisdictions adopt their own. | No | |
| Arizona | $100,000 | None specified | Based on previous or current calendar year sales. | First day of month following nexus | No |
| Arkansas | $100,000 | 200 transactions | Count based on previous or current calendar year. | Day nexus is reached | No |
| California | $500000 in current or previous year | None specified | Only includes sales of tangible personal property. Local sales tax may also apply | ||
| Colorado | $100,000 | None specified | Includes retail sales delivered or sourced to Colorado including non-taxable goods | First day of month following 90 days after meeting nexus | |
| Connecticut | $1,000,000 | 200 transactions | Includes taxable and nontaxable sales; transactions in current or last calendar year. Must meet both thresholds before sales tax requirement kicks in | Oct 1 immediately following passing threshold | Yes |
| Delaware | No sales tax | N/A | N/A | ||
| Florida | $100000 annually | None specified | Excludes the requirement of physical presence. | Day of | No |
| Georgia | $100,000 | 200 transactions | Includes total sales of tangible personal property. | Day of | No |
| Hawaii | $100,000 | 200 transactions | General excise tax applies to all business activities. | First day of month following nexus | No |
| Idaho | $100000 annually | None specified | Threshold based on previous or current calendar year sales. | Day of | |
| llinois | 100000 rolling 12 months | 200 transactions | Includes sales of tangible personal property delivered into Illinois. | ||
| Indiana | $100,000 | None specified | Threshold based on gross revenue from sales into state. Includes electronically delivered products. | Day of | |
| Iowa | 100000 annually | None specified | Based on sales of tangible personal property or taxable services. | First of month 30 days following nexus | |
| Kansas | No threshold | None specified | Any physical presence establishes nexus. | ||
| Kentucky | $100,000 | 200 transactions | Based on previous or current calendar year sales. | First of month 60 days following nexus | |
| Louisiana | $100000 in current or previous year | 200 transactions | Includes both taxable and exempt sales. Local taxes may also apply. | ||
| Maine | $100000 annually | 200 transactions | taxable delivered services | Day of | |
| Maryland | $100,000 | None specified | Based on sales of tangible personal property and certain digital products. | First of month following nexus | |
| Massachusetts | $100000 annually | None specified | Applies to sales made in the previous or current calendar year. | Varies | |
| Michigan | $100000 current or previous year | 200 transactions | Threshold includes all retail sales. | ||
| Minnesota | $100000 annually | 200 transactions | Sales include tangible personal property, electronically delivered goods, and services. Local taxes may apply. | Within 2 months | |
| Mississippi | $250000 rolling 12 months | None specified | Based on retail sales of tangible personal property. | Day of | |
| Missouri | $100000 rolling 12 months | None specified | Threshold includes gross receipts from sales into Missouri. | Yes | |
| Montana | No sales tax | N/A | N/A | ||
| Nebraska | $100,000 | None specified | Based on retail sales delivered into or sourced to Nebraska. | First day after two calendar months | |
| Nevada | $100,000 | 200 transactions | Includes tangible personal property sold into Nevada. | First day after 30 days | |
| New Hampshire | No sales tax | N/A | N/A | ||
| New Jersey | $100000 annually | 200 transactions | Applies to retail sales of tangible personal property. Local rules may apply. | ||
| New Mexico | $100,000 | None specified | Based on gross receipts from sales of property or services delivered into New Mexico. | Jan 1st after reaching threshold | |
| New York | $500000 in previous 4 quarters | 100 transactions | Includes sales of tangible personal property and certain services. | Within one month | |
| North Carolina | $100,000 | 200 transactions | Threshold based on gross sales of tangible personal property and certain digital products. | Day of | |
| North Dakota | $100000 annually | 200 transactions | Applies to retail sales sourced to North Dakota. | Two months after | No |
| Ohio | $100,000 | 200 transactions | Includes taxable sales of tangible personal property or services. | Day of | |
| Oklahoma | 100000 current of previous year | None specified | Threshold based on total sales into Oklahoma. | One month after | |
| Oregon | No sales tax | N/A | Local jurisdictions may adopt their own. | ||
| Pennsylvania | $100,000 | None specified | Threshold includes all sales of tangible personal property. | Next April 1st after | |
| Rhode Island | $100,000 | 200 transactions | Includes sales of taxable and nontaxable property. | Jan 1 after | |
| South Carolina | $100,000 | None specified | Threshold based on gross proceeds of sales. | First of month, two months after | |
| South Dakota | $100000 annually | 200 transactions | Includes sales of tangible personal property, products transferred electronically, and services. | Day of | |
| Tennessee | 100000 rolling 12 months | None specified | Applies to sales of tangible personal property and digital products. | 1st of month, after 3 months | |
| Texas | $500000 rolling 12 months | None specified | Based on total revenue from sales into Texas. | 1st of month, after 4 months | |
| Utah | $100,000 | None specified | Threshold includes sales of tangible personal property, any product transferred electronically, or services. | Day of |
Product Taxability
When it comes to ecommerce, understanding product taxability is a key aspect of managing your business’s tax obligations. Product taxability refers to whether a particular product is subject to sales tax in a given jurisdiction. Not all products are taxed uniformly; in fact, tax rates and rules can vary widely depending on the type of product and the state in which it is sold.
For instance, some states may exempt necessities like groceries or clothing from sales tax, while others may impose tax on these items. Digital goods, such as software or streaming services, can also have different tax treatments compared to physical goods. It’s crucial for business owners to be aware of these nuances to ensure compliance and avoid unexpected liabilities.
Physical Vs. Digital Products
States vary significantly in how they tax physical versus digital products. While tangible goods are generally taxable, digital products like e-books or software may be exempt in some states but taxable in others. It’s important to verify the taxability of your products according to the state laws where your customers reside.
Sales Tax Reporting & Filing
Now, it’s clear that you need a solid system in place to track these at a state level based on that state’s requirements. Ecommerce may seem easy initially, but it can quickly spiral out of control as you approach these thresholds. It’s vital to establish procedures for timely and accurate financial reporting sooner rather than later. You’ll want to employ automation where you can and consult tax professionals to help you track your progress to these thresholds.
Getting the weight of these complexities off of you frees you up to focus on business growth and expansion.
Sales Tax Exemptions
As mentioned, these can vary by state, but there are a few you need to be especially aware of.
Wholesale Exemptions
Let’s say you sell products wholesale. These transactions might not be subject to sales tax if the buyer intends to resell them. Ensure you collect and maintain valid resale certificates from your buyers.
Non-profit Exemptions
Sales of certain goods to non-profit organizations may be exempt from sales tax, depending on the state. To qualify for this exemption, it’s typically necessary to collect and maintain a valid exemption certificate from the non-profit organization. Always verify the specific requirements in each state to ensure compliance.
Sales Tax Holidays
Some states have sales tax holidays. These are often on back-to-school, energy-saving, and computers but can include other items you might not expect. These are excellent opportunities for your customers to save money and boost your sales. But you also shouldn’t be collecting sales tax for a state during their event for qualifying items. Staying informed about these events allows you to take advantage.
Ecommerce & International Sales
International sales differ significantly from domestic sales, as they involve navigating the tax laws of various countries. Unlike domestic transactions, where tax regulations are relatively consistent, international sales often require compliance with different tax systems, including VAT (Value Added Tax) and GST (Goods and Services Tax).
Navigating VAT and GST
Most countries outside the US use VAT. This consumption tax is added each time “value” is added to a product in the supply chain. It becomes part of the price the consumer sees on a price tag and pays. VAT is calculated by subtracting the cost of materials from the product cost because taxes were already added when you bought those materials.
Canada, India, and Australia use a similar system called GST. In this system you’re responsible for collecting and remitting taxes for the whole supply chain at the point of sale.
Compliance Across Borders
To manage compliance, you must:
- Register for VAT/GST in countries you are selling to
- Understand Thresholds within each country
- Use Automated Tools to manage the added complexity of international ecommerce
- Being aware of country exemptions
- Keeping excellent documentation
- Stay up-to-date on tax law changes in those countries
- Consider how International Tax Services can help
Understanding ecommerce sales tax is crucial for any business operating in the online space. It ensures compliance with state and local laws, helps maintain transparency with customers, and prevents costly penalties. From navigating nexus rules to understanding product taxability and managing exemptions, the complexities of ecommerce tax require careful planning and expertise.If you’re looking for guidance on managing your ecommerce sales tax obligations, DHJJ’s experienced team of CPAs and business advisors can help. We offer expert advice tailored to your specific needs, ensuring that you stay compliant and can focus on growing your business. Contact DHJJ today to learn more about how we can assist you with all your ecommerce tax needs.
