Online Sales Tax Guide for eCommerce
Opening your own online store, designing your first website and choosing the right products to sell all bring a rush of excitement and anticipation to eCommerce business owners. But few entrepreneurs are as passionate about another important aspect of online selling: sales and use tax compliance.
After all, taxes just seem so…complicated. There’s a boatload of different regulations to understand, a bevy of varied tax rates that could baffle even the smartest of would-be mathematicians, and enough year-to-year (and even month-to-month) changes that it’s hard to stay on top of it all.
Getting online sales tax right can be especially difficult for smaller eCommerce stores with small staffs and few resources.
At Wix, we want to help eCommerce merchants of all sizes succeed. That’s why we’ve created this Online Sales Tax Guide for eCommerce. We’ve designed it to help you get a high-level understanding of eCommerce sales tax. But one word of caution:
Because tax regulations vary by jurisdiction and change so frequently, always consult with a certified tax accountant or tax compliance expert for advice tailored to your online store’s specific needs.
What is online sales tax?
Online sales tax represents a small percentage of a sales price. Retailers must collect and remit any and all required sales taxes and then submit them to the appropriate jurisdiction. In the U.S., 45 states and Washington, D.C., all have sales tax. Alaska, Delaware, Montana, New Hampshire and Oregon do not charge sales tax on a statewide basis. Most state sales tax rates range between 4% - 7%, with an average of 5.09%.
For states, sales tax drives nearly 34 percent of total revenue. States and other jurisdictions use eCommerce sales tax revenue to pay for roads, bridges, fire departments, schools, public transportation, public safety programs and other vital needs. And states’ reliance on sales tax to improve infrastructure won’t change anytime soon.
The most important thing online store owners should know about sales tax is this: you can’t ignore it.
If you don’t collect the right amount of sales tax and remit it to the proper jurisdiction, you can face financial fines and penalties for noncompliance. Those fines can impact small businesses the most. They also can trigger an uncomfortable and potentially costly audit.
So, whether you’re just getting ready to launch your first online store or you’re growing your already established store’s online sales to new geographies and channels, knowing your eCommerce sales tax obligations must take priority.
How online sales tax varies state-by-state (with examples)
Each state handles online sales tax differently. To start, the sales tax rate varies from state to state. Some, such as Connecticut and Michigan, charge sales tax only at the statewide level. The statewide sales tax rate in Connecticut is 6.35%. In Michigan, it’s a flat 6.0%.
Other states allow local jurisdictions to charge sales tax in addition to the statewide sales tax. For example, Nevada levies a state sales tax rate of 4.6%, but in municipalities within Nevada, the total tax rate may be as high as 8.265%. Similarly, Utah charges a 4.65% statewide sales tax, with local jurisdictions imposing additional sales taxes between 1.3% and 3.4%.
What’s more, five states—Alabama, Alaska, Arizona, Colorado and Louisiana—are considered “home rule” states. That means cities, counties and local governments in those states may enact and administer their own sales and use taxes. Also, some states allow special taxing districts. All of this means that sales and use tax rates can vary from county to county, or even town to town.
While eCommerce sales tax calculations vary by state, so, too, do collection schedules. While some jurisdictions go by calendar year and ask for annual payments, others require eCommerce merchants to file sales and use taxes on a semi-annual, quarterly or even monthly basis.
Don’t let the maze of different regulations and filing requirements trip you up. This guide from Wix gives you helpful hints you can use to navigate the “Tricky 10”—those states with the most complex tax filing rules. And this blog from our friends at Avalara® walks you through the details of online sales tax rules on a state-by-state basis.
When do you need to charge online sales tax?
In general, you need to collect online sales tax whenever someone buys an item from your online store that they can touch. While that broad rule covers most SKUs an eCommerce company offers to its customers—from books and electronics to furniture and cosmetics—there are some exceptions. Again, these exceptions happen on a state-by-state basis.
For example, in some states, groceries and clothing aren’t considered taxable items. Sometimes those exceptions trickle down to the product level. For example, raw foods may be exempt, but prepared foods may be taxable. Also, items that are resold may be tax-exempt because the reseller will be the one responsible for paying the eCommerce sales tax.
Time of year may also play a role in determining when you will collect sales tax. That’s because some states offer sales tax holidays on specific items at predetermined times of the year. For example, Florida offers a Disaster Preparedness Sales Tax Holiday over a 10-day period at the start of each hurricane season. They also offer a back-to-school sales tax holiday for a 10-day period each summer prior to the start of a school year.
In addition, in some states, not-for-profit organizations and government agencies are exempt from paying sales tax on items they purchase.
But while type of item and even type of buyer plays a role in when you need to charge online sales tax, the biggest item online retailers must consider is something called nexus.
The 6 most common types of online sales tax nexus
The definition of nexus changed forever on June 1, 2018. That’s the day The Supreme Court of the United States ruled in favor of the state in the landmark case of South Dakota vs. Wayfair, Inc. That ruling allowed states to require online sellers to collect and remit sales tax based on something called nexus.
What is nexus? It means the online retailer has a “significant connection” with the state. Once nexus is established, online retailers must collect and remit sales tax based on their business activity within that jurisdiction.
The six most common types of online sales nexus are:
01. Economic nexus
05. Affiliate nexus
01. Economic nexus
Right now, all 46 states that levy sales tax in the U.S. have economic nexus requirements. That means, depending on the state, online sellers must collect and remit eCommerce sales tax once they reach either a certain number of sales or a certain dollar amount in sales activity.
For example, some states may require an online seller complete more than $100,000 in sales before reaching economic nexus. Other states may require at least 200 transactions delivered to addresses within the state before reaching economic nexus. Some states count resales or exempt items as part of their threshold requirements; others do not.
All 46 states with economic nexus rules allow a safe harbor from paying sales tax to companies who fall short of the established thresholds.
02. Physical presence nexus
On the surface, this seems to be the easiest type of nexus to understand. If you have a physical presence in a state that charges sales tax, you must pay sales tax to that state. But the definition of “physical presence” is broad. It means online sellers must collect and remit eCommerce sales tax in any state where they have a store, office, warehouse, employee, contractor, salesperson, installer, inventory or kiosk.
Some states also require companies to file online sales tax if they sell products at events like trade shows. Another wrinkle: If you use dropshipping, the ship-to address could trigger a physical presence nexus within a state. This helpful reference guide gives you more details on the relationship between dropshipping and physical presence.
Right now, 46 states have physical presence nexus requirements.
03. Marketplace facilitator nexus
What happens with online sales tax if you sell your products on a marketplace like Amazon, eBay or Etsy?
Forty-six states have marketplace facilitator nexus. That means the third-party marketplace you sell on may be responsible for collecting and remitting sales tax. However, that doesn’t mean you’re off the hook. States have different requirements for what’s included and not included in their marketplace facilitator nexus requirements.
For example, items that are included in California may not be included in Idaho. Another key consideration for online store owners selling on a third-party marketplace: Knowing the location from which that marketplace stores and ships inventory. This could trigger a physical presence nexus in a given state.
04. Click-through nexus
Let’s say your online store is located in South Carolina. But in addition to selling your products on your own website, you also sell products on other websites headquartered in other states. This type of activity could trigger something called click-through nexus, which means you may be obligated to pay online sales tax in those other states. Originally called the “Amazon law,” this type of nexus was first passed in New York state.
Today, 18 states have click-through nexus thresholds. Most of the thresholds are relatively low, so it’s important to know them.
05. Affiliate nexus
This time, let’s say you have an online store based in Oregon. Yet, you have relationships with people in two other states where you don’t currently pay sales taxes. Those out-of-state affiliates advertise your products, and you give them a portion of your profits. This type of relationship may trigger something called affiliate nexus.
Currently, 33 states have some sort of affiliate nexus requirements.
06. Non-collecting seller use tax nexus
Now, let’s say your online store is based in Minnesota. You sell items to customers in South Dakota, but you’re not currently required to collect sales tax in South Dakota. Even so, you may be required to report consumer purchase information to tax authorities in South Dakota and to notify your customers if you meet something called non-collecting seller use tax nexus. Ten states and Puerto Rico currently have such requirements. Get the details on them here.
How to comply with eCommerce sales tax regulations
Once you reach the economic nexus threshold (or the threshold for any other type of nexus) in a certain state, what do you do? In the world of online sales tax, it’s always the responsibility of the online store to register for sales and use tax, verify exempt sales with a valid exemption or resale certificate, and file returns.
Your first step: Register for a sales tax permit. Some states may call this a sales tax license or sellers’ permit. You can find one on the website of the taxing authority where you’ve established nexus. This blog post offers a state-by-state guide to obtaining eCommerce sales tax permits.
The encouraging news: 25 states now participate in the Streamlined Sales Tax (SST) program. That means those participating states have simplified eCommerce sales tax compliance for out-of-state merchants by:
Following a standard set of tax rules and definitions
Managing tax collections
Offering online registration
Supplementing the cost of outsourced tax partners (called Certified Service Providers, or CSPs) who can help you navigate the complexities of online sales tax
This blog post walks you through six essential dos and don’ts for eCommerce sales tax compliance.
How to calculate online sales tax
Once you have the proper sales tax permits, you need to know how to collect the right amount of online sales tax. As a first step, you must know the location where your sales are taxed. This is called sourcing, and of course, it differs by state.
Twelve states in the United States—Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah and Virginia— use origin-based sourcing. That means if your online store is headquartered in Philadelphia and you sell a taxable item to a customer in Bethlehem, Pa., you calculate your eCommerce sales tax using the Philadelphia sales tax rate.
All other online-sales-tax-collecting states in the United States use destination-based sourcing. That means if your Orlando, Florida-based online store sells an item to someone in Tampa, you’re responsible to pay the 6% Florida state sales tax plus the 1.5% sales tax in Hillsborough County, where Tampa is located.
This informative blog post gives you basic calculations for sales tax, total transaction amount, and sales tax percentage from total. It’s a smart place to start.
How Wix and Avalara help you calculate eCommerce sales tax
If you run a small online store, you may be able to file eCommerce sales tax on your own. But if you start to grow—or if you’re already selling your products in multiple states—an automated solution can help.
The good news: The Wix eCommerce platform is fully integrated with Avalara, an automated tax software solution that gives you the most current tax rates for every transaction in the U.S. and across the globe.
To connect your Wix online store to Avalara:
Log into your Wix account
From your Wix site dashboard, click Settings
Select Store Tax
Click ‘Get Automated Tax; on the top right
Click + Add Country to add the regions you sell and ship to anywhere in the world. Avalara will automatically calculate the tax compliance rate for each geolocation you add.
Using the Avalara integration can reduce the time you spend on tax-related activities by 50 percent or more. It can also keep you ahead of the competition. Research from Aberdeen Strategy & Research shows that leading organizations are 3.3x more likely to have automated workflows for tax preparation, filing and remittance, including streamlined processes for calculating taxes across multiple geographies.
How to stay abreast of eCommerce sales tax changes
Tax laws change constantly.
Some trends to watch for in 2022 and beyond: Avalara expects an increase in electronic filing enforcement for online sellers in the tobacco and vape industries. They also anticipate that states will increasingly turn to electronic invoicing and digital filing, using technologies like artificial intelligence and machine learning to increase eCommerce sales tax compliance and speed the audit process. In addition, on January 1, 2023, Missouri will be the latest state to enact economic nexus and marketplace facilitator nexus thresholds.
You can get a full list of 2022 online sales tax changes here.
Turn online sales tax into your superpower
Online sales tax collection and remittance is complicated and dynamic. But it doesn’t have to be a deficit.
eCommerce business owners who use Wix eCommerce to power their storefront can take advantage of automation to help make the right eCommerce sales tax calculations and stay compliant.
Head of Outbound Marketing, Wix eCommerce
Bogar leads thought leadership and outbound marketing for Wix eCommerce. He has an extremely soft spot for all things eCommerce, retail, tech, content, and marketing.