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The Rules of Online Sales Tax

Understanding online sales tax can be tricky for e‑commerce businesses. Here’s what you need to know about collecting and reporting taxes for online sales.

Sales tax is simple enough when you’re a shopper at your local convenience store, but it can be a bit more confusing for business owners. As a business owner, you have to comply with different sales tax laws depending on the state you live in. When a customer makes a purchase, you have to include sales tax on all transactions as a convenience store owner.

If you decide to start an online store, sales tax can be even more complicated. You might be wondering how you’re supposed to deal with sales taxes when some of your customers are in states that have a sales tax while others aren’t. Making sure you’re properly handling sales taxes for online purchases is important to avoid financial issues involving your taxes or business revenue.

The good news is online sales tax isn’t too complicated once you learn the basics. You do need to charge taxes for online sales in some cases, but that’s certainly not always the case. Understanding your state’s tax laws as well as how sales taxes affect online purchases will help you make sure your business is compliant.

You might be wondering, do I need to collect sales tax for selling online? If you want to learn more about online sales tax and how it may affect your business, keep reading.

Sales tax basics

Sales taxes are taxes on certain purchases that an individual makes, such as a purchase at a grocery store. There are different types of sales taxes, and different states have varying laws regarding which transactions are subject to sales tax. Understanding the sales tax laws in your state and how they affect your obligations as a business owner is an important part of owning a business.

When sales tax is applied, the total sales tax for a transaction is added to the final purchase amount, so sales tax is paid at the time of purchase. For brick-and-mortar businesses, sales taxes are as simple as charging sales tax to anyone who comes into your store to make a purchase. If you’re selling services online, sales taxes can be a little more complicated in terms of knowing who it applies to.

If a business doesn’t collect sales tax, it’s the obligation of the purchaser to pay any use tax on any items where sales tax would have applied. This means that the purchaser is required to save their receipt and pay taxes to the state in the event that a business doesn’t charge sales tax.

What is online sales tax?

Most people think of sales tax as a tax that’s charged when you make a purchase at the store, including your local grocery store or convenience store. If you live in a state where sales tax is collected, you may also be required to pay sales taxes on some of your online purchases. When sales taxes are charged on purchases you make online, they’re known as online sales taxes.

As the owner of an online store, it’s important to understand when you’re required to collect sales tax, and when those taxes don’t apply to purchases customers make. While it’s ultimately the responsibility of the purchaser to make sure sales tax is paid, you can make things easier for your customers by applying sales tax when necessary.

If you don’t collect sales tax on a purchase that you should have collected on, the purchaser can still pay use tax later.

Do I need to collect sales tax for selling online?

As an online business owner, you might be wondering if you have to pay sales tax for sales you make through your online store. Sales taxes can be confusing for business owners—there are so many rules about which sales are taxed and which aren’t. This can be even more complicated when you’re trying to figure out if sales tax applies to online purchases as well.

The general rule for sales tax when you’re selling online is fairly simple: If your business has a physical presence in a state, such as a store or a headquarters, you must charge sales tax for online purchases individuals who reside in that state make. Of course, this rule only applies to states that have a sales tax, so you don’t have to worry about sales taxes at all if you operate an e-commerce website with its physical location(s) in a tax-free state.

If you have a physical business location outside of any of these states, you should collect sales taxes for online sales to customers in your state.

How to meet online sales tax requirements

You might be feeling a little overwhelmed if you’re a small business owner trying to make sense of online sales tax. Not only do you need to know when sales tax applies to online purchases, but you also have to go through the process of collecting and reporting sales taxes.

1. Register for a sales tax permit

The first step to meeting online sales tax requirements as a business owner is to register for a sales tax permit. Apply for this permit in your nexus state, or the state where your business has a physical location. If your nexus state doesn’t have a sales tax, you don’t need to worry about collecting taxes online.

Registering for a sales tax permit is as simple as contacting your state’s Department of Revenue and providing some basic identifying information about your business and business activities.

Keep in mind that it’s illegal to collect sales tax without a permit in several states, so you need to register for a sales tax permit before you begin collecting sales tax. Your sales tax permit will also come with a state-issued filing frequency, which is how often you’ll need to file sales taxes. Your filing frequency will typically be monthly, quarterly, or yearly.

2. Collect sales tax

Once you’ve received your sales tax permit and you know your filing frequency, you can start collecting online sales tax. You’ll need to set up all of your shopping carts and online stores in a way that allows you to collect sales tax from applicable customers. It’s also important to make sure you don’t collect sales tax from any customers who aren’t required to pay it.

The actual process of setting up your cart or marketplace to collect sales tax varies depending on what services you’re using. Some services make it easier to calculate sales tax and make sure you’re collecting the right amount of taxes on every purchase. For example, Amazon does an excellent job of providing an engine that allows for very accurate sales tax calculations. Some other online marketplaces, such as eBay, have more limits in terms of sales taxes.

It’s also important to consider whether sales taxes are destination-based or origin-based in your state. Most states have destination-based sales taxes, but here’s the difference between the two:

3. File sales tax

The third and final step to collecting sales tax online is to file your sales taxes according to the filing frequency your state assigned you. As we mentioned previously, online sales taxes are usually filed monthly, quarterly, or yearly. It’s also important to know when your state’s sales tax filing deadline is because different states collect taxes at different times of the month.

Filing your online sales tax is significantly more difficult if you have physical business locations in multiple states. If you have multiple nexus states, you must report the taxes you collected in each state, city, and county. Some states may even have additional filing jurisdictions you need to know about.

If you want to simplify online sales tax, you might want to consider using online sales tax software.

Start selling online

Online retail can potentially be very lucrative, but you need to know the basics before you start an e-commerce business. In addition to learning how to make a website and market your brand, you also need to know how to file sales taxes for online purchases.

With Mailchimp, running an e-commerce business is a whole lot easier. Mailchimp e-commerce automations can help save you time and money, so you have more time to focus on growing your business and perfecting your products. If you want to get the edge over your online competition, try Mailchimp e-commerce tools today.

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