Small Business Tips
Small Business Guide to Internet Sales Tax
There are an estimated 1.3 million e-commerce businesses in North America alone, according to Pipe Candy. Many "but not all" of those in the U.S., have to collect sales tax on online purchases. But is yours one of them?
Read on to learn what obligations your small business has in collecting internet sales tax.
Internet sales tax is a type of sales tax that online sellers assess and collect from consumers on online sales. Online sales are typically those made through online merchants such as Amazon, Walmart or Macy's. Once the tax is collected, online sellers must send it to the state. The growing volume of e-commerce transactions means that sales tax from online transactions can be an important source of revenue for a state.
Sales tax rules are imposed at the state level. Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon are five states that do not impose a sales tax. If you operate in one of these states, you don't need to collect sales tax on online purchases or other purchases. But you may have to collect sales tax if you're an online seller in the 45 other states plus the District of Columbia.
The general rule is, you have to collect sales tax from consumers in states in which you have established what is known as "nexus." The definition of nexus varies state by state, but it generally means you have a significant physical presence in the state.
That physical presence could come in the form of a storefront, office or business representative in the state. Let's say you have an office in California and a manufacturing facility in Texas. You would have to collect internet sales tax on customers in California and Texas since you have a nexus in those states.
As you can see, online sellers don't often have a nexus in all states in which they sell. As a result, many e-commerce businesses were in the past able to get by without collecting sales tax from consumers in certain states.
In addition, not all goods or services sold are taxable. State law may exempt certain items from an e-commerce sales tax.
Some state lawmakers think the loophole created by the nexus rule gives an unfair advantage to online sellers. After all, brick-and-mortar businesses can't escape collecting sales tax on in-store purchases.
In response, Congress introduced the Marketplace Fairness Act (MFA) and Remote Transactions Parity Act (RTPA) in 2017 to level the playing field between online sellers and brick-and-mortar businesses. The laws would require remote sellers (sellers that sell in states in which they do not have a nexus) to still collect internet sales tax from customers in those states.
However, the MFA exempts small online sellers that have $1 million or less in revenue annually and do not have a nexus in the state. The RTPA lets sellers off the hook if they have under $10 million, $5 million or $1 million over the first three years.
The Supreme Court issued a final ruling on the internet sales tax requirement for remote sellers June 2018. Their decision was that internet retailers can be required to collect sales taxes even in states where they have no physical presence. Hence, sellers should be prepared to collect internet sales tax in accordance with state and local tax codes.
Use the following resources for state-specific laws about collecting taxes on internet sales.
Are you determined that you need to assess and collect sales tax? Follow these steps to start collecting internet sales on online purchases.
