E-commerce provides businesses with access to much larger markets, but it also complicates even the simplest of retail transactions. One of the most challenging aspects can be figuring out which sales taxes apply to individual sales, especially when you're selling to out-of-state customers. Here's an overview of when you should collect sales taxes for out-of-state sales and how to keep track of everything.
When To Charge Your Own State's Sales Tax
You would generally collect your own state's sales tax on orders placed from within your own state or delivered there. You should not collect local sales tax on out-of-state orders in most states.
For example, Massachusetts charges its sales tax when the purchaser does any of the following:
- Picks up the item in Massachusetts
- Has the item delivered to a Massachusetts address
- Places their order while in Massachusetts
You would not collect your own state's sales tax if your out-of-state buyer places an order using their computer at home in another state for delivery there.
Keep the charged sales tax funds in separate accounts for each state, and set up automatic sales tax payments to each required state.
Use a professional accountant, CPA, bookkeeper, or an outsourced accounting service to track sales taxes and ensure they're collected accurately.
What About Local Taxes?
Many states collect both a statewide sales tax and local city or county sales taxes as well. 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 To Charge Another State's Tax
You would typically collect sales tax for another state only if you have a physical presence in that state. In legal terms, this is known as having sales tax nexus there.
Your physical presence might be a retail store, a warehouse, or a corporate office, even if the facility is not open to the public. Entering into an affiliate agreement with a resident of the state may also establish a physical presence or nexus there in some states.
Check with your tax advisor as to whether traveling to a state and conducting business there would create nexus if you do business at your customer's locations. This might cause that state's sales tax rules to trigger.
How To Determine Location of Online Sales
A retail transaction that takes place entirely online is sometimes taxed according to 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 To Keep Track of Tax Rates
You're responsible for collecting the correct and current sales tax rate on all sales that require that you collect sales tax. Sales tax rates can change at virtually any time with different rates in each state, county, and city, so it's important to keep on top of them. 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're only responsible for selecting the jurisdictions for which you must collect the taxes.
Make sure that your technology providers update sales tax rates in real time to ensure that your tax rates remain compliant. It's easier than ever to leverage systems with current accounting technology to make sure you're current with rates.
What To Do With the Taxes You Collect?
You must send the sales taxes that you charge to the appropriate state. Many states, such as Michigan, require that you submit monthly sales tax returns when you make payment.
You're collecting the tax directly from the consumer and segregating it in its separate business bank account, so you wouldn't consider it to be 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.
Frequently Asked Questions (FAQs)
What happens if you don't collect sales tax?
If you fail to collect sales tax for a state in which you're responsible for collecting it, you still owe the tax. State and local tax authorities will seek to collect past taxes you should have collected, and they may charge you interest or other penalties on the past-due balance.
How do I register to collect state sales tax?
You need to register your business with any state for which you'll be collecting sales tax. To learn how to register, contact the state's department of revenue or other tax authority. Be sure to have business information available, including your employer identification number, business address, and banking information if you plan to pay sales tax electronically.
How much do you need to sell before you collect sales tax?
Some states have exemptions for total sales below a certain amount, but not all do. Check with any states where you have a business nexus to determine when you need to begin collecting sales tax.