How to File Sales Tax: A Guide for Online Sellers
Heads up: this article is only relevant for U.S. businesses.
Sales tax is one of those administrative hassles that can command your attention and derail all of your productivity.
In this guide, we’ll explain the steps you’ll need to take to collect, report, and file your ecommerce sales tax, and help you conquer sales tax once and for all.
1. Determine if you have a sales tax nexus
Forty-five U.S. states and the District of Columbia all have a sales tax. Sales tax is administered at the state level and every state is a little different.
Note that there is no “federal sales tax” and the IRS isn’t involved with sales tax at all.
Instead, sales tax is governed by each state’s taxing authority, which is often known as the state’s “Department of Revenue,” but can also go by many other names. (California’s is the “Board of Equalization.”)
To figure out which of your buyers to charge sales tax, you first need to determine in which states your business has sales tax nexus. “Nexus” is just a legalese way of saying “a significant connection.”
Here are the factors that commonly establish sales tax nexus:
- Home State Nexus: You will always have nexus in the state where you live and run your business. Home state nexus is a fact of life even if you run your business from your kitchen table or you store every single one of your products in another state.
- A Physical Location: A store, warehouse, distribution center, factory, office, or other location creates nexus in a state.
- Employees: An employee in a state creates sales tax nexus.
- Contractors/Salespeople: In most cases, contractors and salespeople traveling in a state create sales tax nexus. Read more about nexus and contractors and nexus and salespeople in these posts.
- Property in the State: You may store inventory in a warehouse in a state, or have some other property in a state like trucks, computers, office space, etc. This is considered a tie that creates nexus.
- Third Party Affiliates: If you have an affiliate program where third parties send you sales in exchange for a small percentage of your profit on that sale, then you may have “click-through nexus” in several states.
- Temporarily Doing Business in a State: Say you cross state lines to attend a craft fair or sell products at a tradeshow. In some cases (depending on the state), this can create a sales tax nexus. You can find out more about sales tax and trade shows here.
Long story short, you always have sales tax nexus in your home state. This means that, unless you are lucky enough to live in one of the five states without a sales tax (Alaska, New Hampshire, Delaware, Oregon, and Montana), you need to register for a sales tax permit in your home state, and begin charging sales tax when you sell a taxable item to customers in your home state.
For example, if you live in Texas then you have “home state nexus” there and should charge sales tax to buyers in Texas.
But if you only have nexus in Texas and make a sale to a buyer in Washington state—a state where you don’t have nexus—then you don’t need to charge sales tax to your Washington buyer.
Other business activities may cause you to have sales tax nexus in other states, too. Be sure that you aren’t overlooking a nexus state without even realizing it.
If you find you have sales tax nexus in another state, you should register for a sales tax permit in that state and begin charging sales tax to buyers there, too.
Remember, every state governs sales tax in their own way and treats the definition of sales tax nexus a little differently. Check out this post if you want to see exactly what each individual U.S. state has to say about sales tax nexus.
Always remember that if your ecommerce business has nexus in a state, you should charge sales tax to buyers in that state.
Once you’ve determined where your business has nexus, you’ll need to register for a sales tax permit.
2. Register for a sales tax permit
Before you begin collecting sales tax from buyers, head over to your state’s taxing authority and register for a sales tax permit.
You’ll need to register for a sales tax permit in each state where your business has nexus.
Don’t skip this step! One of the biggest sales tax mistakes you can make is collecting sales tax without a permit. In the eyes of the state, if you collect without a permit, you’re collecting the sales tax in their name and putting it in your pocket. This can lead to big penalties or even jail time in extreme cases.
When you register for a sales tax permit, your state will give you a registration number and assign you a sales tax filing frequency. You’ll generally be assigned to file either monthly, quarterly or annually. This frequency is based on your expected sales volume in the state.
3. Collect sales tax
Once you have your sales tax permit (or – if you have nexus in multiple states – permits) in hand, your next step is to start collecting sales tax. You should collect sales tax from buyers in every state where you have sales tax nexus. Be sure you’re collecting sales tax on every platform you use to sell, too.
Almost all online shopping carts will allow you to set up sales tax collection, but some are a little more complicated than others.
Some states consider some items non-taxable. Food, clothes, and supplements often fall into this category in many states. If you are selling a non-taxable item to a customer, you don’t need to charge them sales tax. Double check product taxability with the state’s taxing authority if you think you’re selling a non-taxable item.
Further, some states consider the shipping charges you charge your customer to be taxable (as long as you’re shipping a taxable item), whereas other states don’t. You can click here for a list of states where shipping charges are taxable.
4. Report how much sales tax you’ve collected
By now, you’re all set up. You’ve figured out where you have nexus, secured your sales tax permit(s), and you’re smoothly collecting sales tax from customers.
What happens when the taxable period ends and it’s time to file sales tax?
As with many aspects of sales tax, it depends on the state.
You may be lucky enough to be filing in a state with a flat sales tax rate and simple filing. In this case, you just figure out how much sales tax you collected from buyers in that state (be sure to add up sales tax from all the platforms on which you sell) and remit that to the state along with a sales tax filing.
But the vast majority of states aren’t that simple. They want you to break down how much sales tax you’ve collected not only by state, but also by county, city, and other special taxing jurisdiction. If you have to file in complicated states like this, sales tax reporting can take hours. And that reporting is only aggravated if you have to factor in sales tax you collected through multiple ecommerce channels.
There’s where sales tax automation can help. Your sales tax automation solution will connect with the channels through which you sell, report how much sales tax you should file in each state, county, city and other district.
Once you’ve figured out how much sales tax you’ve collected, you’ll need to file your sales tax return.
4. File your sales tax return
When you’re ready to file, simply log into your state’s taxing authority filing system and file your return. You’ll be guided through submitting your payment, and then you’re all set.
That said, there are a couple of important factors to keep in mind when it comes to filing a return:
- Always File “Zero” Returns: The vast majority of states require you to file a sales tax return even if you didn’t collect any sales tax over the taxable period. Failing to do so can result in anything from your sales tax permit being revoked to a monetary penalty.
- Don’t Overlook Discounts: About half of the states realize that sales tax is a pain point for merchants. To soften the blow a little, they offer a sales tax discount to sellers who pay on time. You can find a list of state sales tax discounts here.
Once your sales tax return is filed, you’ll have successfully conquered sales tax. Now you can get back to doing what you do best–running your business.
TaxJar is a service built to make sales tax compliance simple for ecommerce sellers. Start your 30-day-free trial of TaxJar today, and eliminate sales tax compliance headaches from your life.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.