It wasn’t long ago when online shoppers were under the impression they were shopping tax-free. It has become widely clear however that it is not true. This goes both ways. The sellers of the online markets have dues to be paid just as a bricks and mortar retailer. So, if you’re looking into creating, marketing and selling a product online, be sure you are well versed in how you will be taxed.
The biggest and foremost consideration for online retailer tax is legal concept called “nexus”. Retailers in only forty-five states and the District of Columbia are required to collect sales tax from customers. If, as an online retailer, you have a significant business presence in one of these places, you too will have to collect sales tax. A significant business presence can include anything from a physical office or employee to a pop-up trade show of craft-fair. If you are unclear of your affiliations with a certain state, you can check with your accountant or look up online at www.taxjar.com to find out more.
Once you have determined your nexus status in each state, you then have to register for a sales tax permit. This will allow you to begin collecting sales tax in the states you have nexus. To retain a permit, visit the state’s Department of Revenue website. The frequency of payment is determined by the state but it is generally monthly, quarterly or annually. Take note of your deadline so you never miss it and can prepare in advance.
Now you’re ready to start collecting taxes. The ways in which you collect depend on the platform that you’re using. Services like Amazon, Square, Shopify etc have an account setting that you “turn on”. Refer to their help section or contact their customer support if you are unsure. If you sell items on more than one platform, this setting has to be switched on in all applications. Remember, you will be only be collecting sales tax in states where you have nexus so keep track of your sales and marketing in case this changes.
Once your tax filing due date is beginning to approach you must prepare the calculation. Some platforms make this easy on you by being able to run reports but mostly, you either track this with every sale you make or calculate the numbers manually in one fell swoop (which can be daunting if you have a large customer base). The other thing to consider here is because you’re not only based in one town or country or state, you have multiple laws to adhere to. One or more of your nexus states might require your sales by county, city or other taxing code. If this becomes too much, seek the help of a financial pro.
Now that the hard part is over, it’s time to part ways with that “extra” money. You’re basically a holding cell for the sales tax you’ve collected and now those states want it back. In order to do that, you file your taxes with the nexus states and the other states. That’s right, wherever you don’t collect sales tax, you still have to file. It’s like if you haven’t worked for a year, you file your personal taxes for that year so the federal and state governments know neither of you are owed any money.
All-in-all, once you’ve completed the above steps and have done so over and over again, they become clearer and easier to navigate. Try your best to stay on top of your collections in order to make the calculations just that much simpler.