How to Handle Sales Taxes When You Sell Across State Lines
While e-commerce provides access to much larger markets, it also complicates even the simplest of retail operations. One of the hardest aspects can be figuring out which sales taxes apply, especially when you're selling to out-of-state customers. Here's an overview of when you should collect sales tax and how to keep track of everything.
When Do You Charge Your Own State's Sales Tax?
You generally collect your state's sales tax on orders placed from within or delivered to your own state. In most states, you should not collect local sales tax on out-of-state orders.
For example, Massachusetts charges sales tax when the purchaser
- Picks up the item in Massachusetts
- Has the item delivered to a Massachusetts address
- Places their order while in Massachusetts
If your out-of-state buyer places an order using their computer at home for delivery to another state, you do not collect your local sales tax.
Use a professional accountant, CPA, bookkeeper or outsourced accounting services to track sales taxes and ensure they're collected accurately. Keep the funds in separate accounts, and set up automatic sales tax payments to each state.
What About Local Taxes?
Many states have both a statewide sales tax and a local city or county sales taxes. You must collect all applicable taxes, and you should generally collect the sales tax rate that applies at the location of the sale. California follows this rule.
When Do You Charge Another State's Sales Tax?
You typically only collect sales tax for another state when you have a physical presence in that state. In legal terms, this is known as the nexus test.
A physical presence can include a retail store, warehouse, or corporate office, even if the facility is not open to the public. In some states, entering into an affiliate agreement with a resident of the state may also establish a physical presence in that state. If you do business at your customer's locations, you should check with your tax advisor as to whether traveling to a state and conducting business would cause the state's sales tax rules to trigger.
How Do You Determine the Location of an Online Sale?
A retail transaction that takes place entirely online is sometimes taxed by the shipping address. States presume that online orders are physically placed from the shipping address with the intent to use the item at the shipping address. Make sure that you read the rules for the specific states in which you do business.
How Do You Keep Track of the Different Tax Rates?
You are responsible for collecting the correct and current sales tax rate on all sales that require you to collect sales tax. With different rates in each state, county, and city, the sales tax rate may change at virtually any time.
Each state usually has an online database with current sales tax rates. Most e-commerce platforms look up the customer's address automatically and charge the applicable tax rate. You are only responsible for selecting the jurisdictions for which you need to collect sales taxes.
Make sure that your technology providers update sales tax rates in real time to ensure your tax rates remain compliant. With current accounting technology, it's easier than ever to leverage systems to make sure you're current with your rates.
What Do You Do With the Sales Tax You Collect?
You must send the sales taxes that you withhold to the appropriate state. Many states, such as Michigan, require you to submit monthly sales tax returns.
Since you're collecting the tax directly from the customer, you do not consider it as part of your income. Failing to pay the correct amount in full and on time is a serious offense, and it could lead to losing the right to do business within the state, as well as hefty fines.
National Conference of State Legislatures. "Remote Sales Tax Collection." Accessed March 22, 2020.
Mass.gov. "830 CMR 64H.6.7: Out-of-State Sales and Deliveries." Accessed March 22, 2020.
California Department of Tax and Fee Administration. "Sales & Use Tax in California." Accessed March 22, 2020.
California Department of Tax and Fee Administration. "Regulation 1620. Interstate and Foreign Commerce." Accessed March 22, 2020.
Washington State Department of Revenue. "Destination-Based Sales Tax." Accessed March 22, 2020.
Michigan Department of Treasury. "FAQs for Sales and Use Tax." Accessed March 22, 2020.
IRS. "Publication 334 (2019), Tax Guide for Small Business (For Individuals Who Use Schedule C): For Use in Preparing 2019 Returns," Page 25. Accessed March 22, 2020.
Illinois Revenue. "Collections Process." Accessed March 22, 2020.