Sales Tax Impact for eCommerce Sellers
What are Sales Taxes?
US sales tax is a tax paid to a local governing body (State or Local) for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. Subsequently the seller is obligated to remit sales taxes collected into the state or local tax authorities. For large “brick and mortar” retailers (such as Macy’s) understanding what jurisdiction to comply with is simple. The point of sale is where the buyer physically purchases the goods, which would be the State (or local town) of the store in which the purchase was made.
For e-commerce sellers, there ordinarily is no physical store for which the purchase occurred. For most states, sales tax is a destination-based tax. This means that the transaction is potentially taxable in the State (or local town) where the order was shipped to. This can be a very scary thought for online sellers because at scale you can have orders shipped to many different jurisdictions.
Where do I need to comply with Sales Taxes?
As an eCommerce seller, you need to consider sales tax compliance in jurisdictions for which you have nexus. Nexus is a tax term that essentially means presence. There are two types of nexus, physical nexus and economic nexus.
Physical nexus is a fairly straight-forward concept to understand, it essentially is determined by where your business has a physical presence. Some common examples include (but are not limited to):
- Inventory – This includes all states that you have physical inventory stored in (including 3PL, Warehousing, FBA etc)
- Employees – This includes where your W-2 (non contractor) employees are located. This usually does not include independent contractors, including those that live overseas.
- Owner’s location – This includes where the owners are physically located and operating the business from.
- Office space – This includes office work space (either rented or owned) at which your operations occur.
Economic nexus is a less straight-forward concept. The intent of the economic nexus is for State & Local Tax Authorities to generate sales tax revenues, even if Online Sellers do not have physical presence in their state. For purposes of simplicity, think of this concept as states for which you have no physical presence but you have a high volume of sales.
Unfortunately every state has their own rules, so this can be a very research intensive effort for you to remain compliant. Most of the states have adopted similar rules, so we will present what these rules are, but we do caution you as the seller, to consider further diligence around economic nexus.
Most economic nexus states have adopted the following thresholds for the trailing 12 months:
- 200 sales transactions – this essentially means 200 orders delivered into the state over the previous 12 months
- Or $100,000 in total Gross Sales over the previous 12 months.
If either of these rules are met, the state views the seller as having economic nexus, and technically requires the seller to be Sales Tax compliant going forward.
I have Nexus, what does Sales Tax Compliance Entail?
If you determine that you need to be Sales Tax Compliant in a jurisdiction, you need to register with that jurisdiction to acquire a Sales Tax Permit (Some states have a different title for this, but it is essentially the same for each state).
Once you have a state Sales Tax Permit, you are required to charge sales taxes to your customers on orders that ship to the state. You are then required to remit those sales taxes that have been collected from your customers on orders to that state.
For example, if you have a sales tax permit in NY you are generally required to charge sales taxes to any customers on orders that ship to NY. Then you are obligated to remit those Sales Taxes collected to the state of NY.
Doesn’t Amazon handle sales tax for me?
To add another (unwanted/unneeded) layer of complexity, Amazon has adopted Marketplace Facilitator rules for many states. If you are an Amazon Seller, this essentially means that Amazon is collecting sales taxes from the customer on your behalf (as the seller) and Amazon is remitting the sales taxes to state & local tax authorities on your behalf. For purposes of clarity, this means in the states where Amazon is considered a marketplace facilitator, you (as the seller) do not need to register or regularly file sales tax returns to keep compliant.
There are a couple of caveats in relying solely on Amazon for your sales tax obligations:
- There are still a few states for which Amazon is not considered a marketplace facilitator. For those states, you are still required to be sales tax compliant if you have Nexus.
- If you have sales channels outside of Amazon (for example Shopify), you need to consider those states separately for sales tax compliance.
Sales tax is a very complicated concept, especially for eCommerce sellers shipping to all 50 states. As with anything legally binding, it’s best to consult with a sales tax professional to make sure your business is compliant with all applicable tax laws. The Ecommerce Accountants is an accounting firm that specializes in eCommerce entrepreneurs including Amazon Sellers, Shopify Sellers, Dropshippers, and more.
About the Author – Chris Rivera, CPA
Chris Rivera founded The Ecommerce Accountants in 2019 specializing in tax, accounting, and business structuring for eCommerce companies including Digital Marketers, Drop Shippers, Amazon FBA, Internet Coaches/Gurus. Chris works with some of the most high profile and influential individuals and businesses in the eCommerce space.
Prior to the start of his firm, Chris spent six and a half years with Ernst & Young specializing in tax and accounting for retail consumer products and service companies. During this time, Chris worked entirely with multinational businesses (both public and private) providing services including: business structuring, accounting consulting, auditing, tax compliance, and tax planning.
Chris graduated from the University at Albany and is a New York State Certified Public Accountant.