If anything scares people away from starting their own online business, it’s handling the legal stuff. One of the most intimidating issues is online sales tax—how are you going to deal with the laws for your own state, plus all the states your customers are located in?
It might actually be easier than you think.
Note: Article last updated May 2016. This article is not intended to cover every detail of sales tax law, or to replace the advice of a tax professional. You are responsible for your own understanding of, and compliance with, the law.
If you make less than $1 million in sales per year:
We recommend you read on to learn about special and unusual laws that may apply to you. However, you can generally cover all of your bases by following the four steps above.
If you make more than $1 million in sales per year: Things are going to get too complicated for us to cover here. Hire a tax professional!
Now for the long version . . .
Typically, if you’re a small seller, you don’t have to pay any sales tax for products you sell to customers in other states. The customer pays what’s called a “use tax” instead. This is often a small amount, based on an estimate of how much they spent buying goods online from out-of-state sellers, which they pay when filing their taxes.
However, this is a topic of much debate in both DC and the state governments. It may change before long.
Typically, you only have to collect and pay sales tax if you have a physical presence, or “nexus,” in the same state as your customer.
If you make a sale to someone else in your state, you need to collect and pay sales tax.
If your business has nexuses in two states, you generally have to collect and pay sales tax in both.
Let's say you ran a business with two nexuses: an office in California and a sales representative in Massachusetts. If you sold to a customer in California, you’d need to collect California sales taxes; if you sold to someone in Massachusetts, you’d need to collect MA taxes. But you wouldn't have to collect sales tax on a sale to someone in Arizona.
Some states have very broad definitions of what a nexus is. Dropshippers and anyone with employees located in other states should take the time to really learn each state’s definitions. You may also be liable for sales tax in several states if you use Fulfillment by Amazon or another service that warehouses your goods in other locations.
Certain states have special online sales tax requirements.
Most unusual sales tax laws only apply if you sell a lot to customers in a specific state each year. For example, if you make over $250,000 of sales to customers in Alabama per year, you generally need to collect Alabama state sales tax and pay it to the state.
Special rules, typically referred to as “Amazon laws,” apply to companies using affiliate marketing programs. For example, if your affiliates based in Arkansas sell over $10,000 worth of goods to customers in Arkansas, then you need to pay their sales tax. Connecticut has a similar rule that kicks in at just $2,000.
The funny thing about Amazon laws is that they don’t affect most Amazon sellers. They only have an impact on Amazon Associates and other affiliate marketing programs. If you’re selling physical goods directly and aren’t having people in other states promote your products, you don’t need to worry about these laws.
We recommend the Nolo Internet Sales Tax guide. It provides a quick breakdown of each state’s laws as well as links to further information. Of course, you should be certain to consult government websites as well, as these are the only official sources of sales tax info online.
State sales tax rates range from nonexistent (in states like Alaska and New Hampshire) to 7.5% (in California). Most states have a sales tax between 4% and 7%.
On top of that, local sales or use taxes may apply, and these range from 0% to 8.5%.
Combined, these taxes can reach a total as high as 12.75% (in Louisiana).
You can find a very helpful table at the Sales Tax Institute website. TaxJar also provides excellent, easy-to-read breakdowns of how these taxes work in each state.
Companies with affiliate programs or over $1 million in sales per year will have complex tax situations and would do well to hire tax professionals. Luckily, they should be able to afford it!
Small sellers only need to worry about online sales tax laws in states in which they have a nexus. If you’re selling out of your basement, you should only have to worry about your own state’s laws.
Things might get more complicated if you use a program like Fulfillment by Amazon. In such a case, you may want to purchase sales tax software to automate the process. Taxify is worth your consideration.
If you’re running an ecommerce business, complications like online sales tax can become overwhelming. Don’t let them bog you down! Find other ways to simplify your business with these six ecommerce shipping solutions, or streamline your customer service by getting Amazon and eBay messages in your CRM.