The internet has been a huge boon to the economy, making life easier for both consumers and businesses. Unfortunately, it has also resulted in a completely new set of complicated rules that must be followed when selling products online. The good news is that once you’ve learned these rules, they’re fairly simple to follow. In this article, we’ll define internet sales tax and explain why you must charge sales tax on online purchases even if you don’t have a physical storefront in your state.
What exactly is Internet Sales Tax?
Internet sales tax, in its most basic form, is the tax levied on the sale of a product or service from an online retailer or e-commerce business owner. This tax is levied by the state where the product or service is sold, not the state where the business is located.
Is it necessary to collect sales tax when selling online?
Yes, and internet retailers can thank a 2018 Supreme Court decision for having to collect sales tax from customers and file tax returns. Prior to that, in the early 1990s, Quill v. North Dakota established sales and use taxes. The decision required states to impose sales and use tax collection and remittance obligations on internet sellers solely based on their economic activities in the state.
Sales tax laws did not require online sellers to collect sales tax in the early days of the internet. However, as computer use increased and popular products became available for sale on the internet, the growth of internet sales skyrocketed. As a result, states saw a decrease in sales tax revenue from brick-and-mortar businesses. As a result, they pushed to extend sales tax requirements to online sellers in order to recover state revenue, which resulted in changes to the laws.
That push resulted in the 2018 Supreme Court case South Dakota vs. Wayfair, Inc. The case, known colloquially as “Wayfair,” overturned Quill and resulted in new internet tax reforms.
According to the Wayfair decision, states can require out-of-state online sellers to collect and remit sales tax, regardless of whether the retailer has a physical presence in that state. As a result of the ruling, several states now have laws requiring internet sellers to collect and remit sales tax.
What types of businesses are required to pay sales tax on internet sales?
The Wayfair decision has an impact on both remote sellers and marketplace facilitators. And these online retailers aren’t just concerned with collecting your sales tax. They must also ensure that they are paying the correct amount of sales tax on their goods and services.
Businesses can accomplish this in two ways:
- By establishing a physical presence, or “nexus,” in each state where they sell their goods or services.
- By meeting the state’s economic sales tax nexus threshold.
Sales Tax Nexus Varieties
Any remote seller should be aware of the various laws in each state. The state provisions are known as “remote seller nexus” or “sales tax nexus,” and they determine a company’s physical presence in a state. If they meet the definitions below, they must register as a retailer and collect sales taxes.
- Click-Through Nexus: This nexus occurs when an out-of-state company establishes a click-through nexus in a state and an in-state company receives a commission for referring a certain number of sales to the out-of-state company. This procedure is typically implemented in the form of a link on a website that you must “click-through” to access the goods and services.
- Marketplace Nexus: When an organization operates in a state and provides e-commerce infrastructure, this nexus is activated. Marketing, customer service, and payment processing services are all part of this infrastructure.
- Economic Nexus: An economic nexus requires an out-of-state retailer to collect sales tax once they reach a certain level of gross receipts activity or sales transactions in the state in which they are conducting transactions.
- Affiliate Nexus: Online retailers who use in-state affiliates to market and sell their products have enough nexus to collect online sales, remit these sales, and use the taxable retail sales of services and tangible personal property. Online sellers who have an affiliate nexus must collect sales tax from their affiliates.
State Sales Taxes Online
The majority of states in the United States have established rules for online state sales tax. For example, the state of Washington requires all businesses doing business in the state to collect and remit sales or use taxes on taxable retail sales transactions, unless certain exemptions apply (for example, clothing under $100).
While there is no federal law requiring remote sellers with virtual (online) presence to collect and remit internet sales tax, the state’s taxing authority requires online retailers without a physical presence in the state to collect use tax.
States with an Economic Sales Tax Nexus
An economic sales tax nexus necessitates the collection of sales tax by internet sellers in states where their sales exceed certain monetary or transactional thresholds. As previously stated, states take the legislative position that an organization has an economic nexus if its annual retail sales of goods and services exceed a monetary threshold or if it conducts a number of transactions. Arkansas, for example, has an economic nexus threshold of $100,000, or at least 200 separate transactions.
Currently, there are 46 states and the District of Columbia with an economic sales tax nexus. Internet sales tax is not levied in Delaware, Montana, New Hampshire, or Oregon.
The following states collect state sales tax and have an economic nexus:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
So, if your company sells goods or services into one of the states listed, you must collect and remit state sales tax on those transactions if you exceed their economic nexus threshold. The sales tax rate varies by state, ranging from 1.76 percent in Alaska to 9.55 percent in Tennessee.
States with a $10,000 Sales Tax Threshold for Sales Tax Collection
There aren’t any. Pennsylvania and Washington previously had economic nexus legislation for a $10,000 sales tax threshold. Both states enacted sales tax rules in 2019 that raised their tax thresholds to $100,000.
States with a Sales Tax Threshold of $100,000
Most states have a $100,000 economic nexus threshold. They are as follows:
- Alaska
- Arizona
- Arkansas
- Colorado
- Connecticut
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentuck
- Louisiana
- Maine
- Maryland
- Massachusetts
- Minnesota
- Missouri
- Nebraska
- Nevada
- New Jersey
- New Mexico
- North Carolina
- North Dakota
- Oklahoma
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
States with a $250,000 Sales Tax Exemption
Alabama and Mississippi are the only states with a $250,000 economic nexus threshold.
States with a $500,000 Sales Tax Exemption
California, New York, and Texas have a $500,000 economic nexus threshold.
Selling Across State Lines
If you sell goods or services across state lines, you should be aware of the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA is a multistate agreement that allows remote sellers to collect sales tax at the customer’s home state’s rate.
For example, if a company is based in Florida but sells in Georgia, the company must collect Georgia sales tax. The SSUTA is an agreement among states to simplify their sales and use tax laws in order to make it easier for out-of-state sellers to comply. The SSUTA currently has 44 members (including Washington, D.C.).
How to Ensure Your Company Is Sales Tax Compliant for Online Sales
It is prudent to ensure that your online business complies with the various sales tax laws. Here are some pointers to help you get started:
- Determine whether or not more than one state has a claim against your company (i.e., economic nexus). If this is the case, make sure to register as a seller in those states and collect their sales taxes.
- Contact the department of revenue in the state where your business is located to register for a sales tax permit in your nexus state. This is usually done via their website or by mail.
- Update the sales tax settings on your website to reflect the correct rates for the states in which you have nexus.
- Determine the taxability of your product. When it comes to what products and services are taxable, each state has its own set of rules and regulations. It is critical to understand these rules in order to charge the proper amount of sales tax on your products. This information can be obtained by contacting the department of revenue in the state where your business is located or visiting their website.
- Check that your accounting software is set up to track sales taxes by state.
- Maintain accurate sales records, including product and customer contact information. This precautionary measure will be useful if the taxing authority has any questions about a specific sale.
Software that can assist you in ensuring that your business is sales tax compliant for online sales
It is critical for online sales tax compliance that you set up and begin collecting sales tax for all of your online marketplace and shopping. That means you’ll need to check each platform to see if it supports sales tax collection. If this is the case, it is preferable to use software tools rather than manually collecting sales tax from your customers.
If your platform does not provide an automated sales tax tool, you can use TaxJar’s free WooCommerce plugin or Chrome extension to calculate sales taxes. This plugin will calculate and generate a file for your customers based on the amount of sales tax you owe. You can then upload that file to each marketplace or shopping cart where your products are listed.
Then, by state and local municipality, report and file sales tax. Depending on your state’s requirements, you’ll need to do this quarterly or annually.
Another way to ensure that your company is collecting and remitting sales tax for internet sales transactions is to use a reputable software platform.
Avalara’s AvaTax Compliance Cloud, for example, uses authoritative tables, rules engines, and real-time updates from thousands of sources to automatically calculate accurate state-to-state transaction taxes.
Tax laws are constantly changing, and Avalara’s tool checks for and notifies you of any changes to a law or tax rate. This relieves you of the burden of constantly keeping up with changes in tax laws and rates.
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