Every company in the U.S. needs to worry about taxes at one point or another, whether that time comes throughout the year as you calculate withholdings for your employees or when your business return comes due. However, as an ecommerce company, there may be a few more details you should know about to make it through tax time unscathed.
One of the major benefits of an ecommerce business lies in its flexibility: you can sell anything to anyone at any time. While this sounds like a benefit, and in most cases it is, crossing state lines can open up challenges in the form of sales tax. Here’s what you need to know to ace tax time in your ecommerce business.
Sales Taxes: The Basics
Sales tax refers to the percentage of tax imposed on the sale of ordinary goods and services. 45 states and the District of Columbia impose sales taxes on most purchases, adding to the sticker value of a particular item. Functioning as a pass-through tax, merchants are required to collect funds for these amounts to be paid to the proper authorities on a set basis (usually monthly, quarterly, or annually). The rules on sales taxes vary greatly from one location to another, with some states charging tax on shipping and others, even in tax-free states, adding on a local tax amount.
In general, sales taxes should be collected anywhere you occupy a tax nexus. While definitions will vary, this generally refers to any location in which you have a headquarters, inventory warehouse, employee residence, or manufacturing plant. So, if your headquarters is in Illinois but you manufacture in Louisiana, both of these locations are thus considered a tax nexus.
Note that some localities are origin-based while others are destination-based. This means that some areas require a tax rate imposed at the point of origin (ex: your office location) while others take a destination-based approach (ex: the buyer’s location).
Playing By the Sales Tax Rules
In order to play by the rules and collect taxes legally and lawfully, there are a few extra steps you need to take. First, all sellers must obtain a sales tax permit – taxes cannot be collected from buyers without one. This process is relatively straightforward; most states require a basic application that covers high-level information about your company and its functions.
Once you have your permit, you’re ready to start taxing your sales. It’s important to note that not all purchases will be subject to tax; instead, you’ll only need to collect on sales that relate to your tax nexus. So, if your company is headquartered in Illinois and all of your operations occur within, you will only need to charge sales taxes to purchases shipped to an Illinois address. Most ecommerce platforms have sales tax rates built in, allowing you to levy appropriate amounts from customers automatically with every transaction.
Sales tax can be a little confusing, especially if you’re new to the wide world of running your own business. If you want to ensure you’re handling tax collection by the book, Klein Hall CPAs is happy to help. Get in touch with us today!