If you’re new to selling online – or if your store has only started to grow recently – you may be wondering about sales tax. What should you collect? What rates apply in which states? How do you collect and send money to the right entities? etc.
The good news is that, if either a) you’re a smaller retailer or b) just getting started, you probably don’t need to worry much about collecting sales taxes outside of your home state. As the video below will explain, in-state sales tax is usually all most etailers worry about.
First, A Note For The Lawyers
We aren’t tax consultants. We aren’t accountants. We aren’t lawyers. We can’t advise anyone reading this about the “right” decision to make regarding sales tax collection. We can provide information, however, and that is the goal of this post.
But we’re not liable for any advice you take from this post, any inaccurate info, etc. Please do your due diligence in all matters relating to sales tax.
Next, Some Online Sales Tax History
In the early days of the internet, anything you purchased online was essentially “tax-free,” meaning that no one was collecting or paying sales tax for online orders. While this was fine in the very beginning of the ol’ world wide web, by the 2010s this so-called “tax-free” rule was causing problems:
- Brick and mortar retailers were starting to feel the effects of online competition, and complained loudly about how unfair it was for them collect sales tax while online retailers could skip it.
- There was this pretty major economic downturn in 2008 or so that reduced city and state sales tax revenue a LOT. Tax collectors started looking for a way to get some of that lost revenue back, and many decided to require online retailers to collect taxes.
Of course, it’s never easy to change the rules. Someone sued, a court case went all the way to the Supreme Court, and wouldn’t you know it the court ruled that sales tax had to be collected. Shocking, no?
New(ish) State-By-State Rules For Online Sales Tax Collection
After the Supreme Court said that states could collect sales tax, most states drew up some laws around sales tax collection. All of these laws tend to follow the same basic rules:
- If you sell an item to a customer in your same tax jurisdiction (eg the same state as your company, the same county, and/or the same city), then you must collect and remit sales tax at the appropriate rate(s).
- If your store fills more than a certain amount of orders in a specific state OR your store sells more than a certain dollar amount of product in a specific state, you must collect taxes for that state.
Each state has different thresholds for sales and/or orders. A state like California, for example, doesn’t care about how many orders you fill. All they care about is retailers who sell more than $500k worth of product into California in a calendar year.
This means that, if your store doesn’t ship more than $500k worth of “stuff” to California in a calendar year, you don’t have to even think about collecting California sales tax.
Other states are different:
- Alabama expects any online retailer selling more than $250,000 worth of product into Alabama to collect sales tax.
- Utah says they only want online retailers to collect sales tax if they sell more than 200 orders in Utah or they sell more than $100,000 in product to Utah residents.
- Pennsylvania says they don’t care about the number of orders, they just expect retailers who sell $100k+ worth of product to PA residents to collect sales tax.
And so on. Avalara – a company that offers sales tax software – has compiled a good list of sales tax thresholds by state that you can see here. In our experience, Avalara does a good job of maintaining this list.
But the long and short of it is that, in most states, if you’re selling less than $100k in product to people in the state, you don’t need to collect sales tax. This is obviously a great relief for smaller ecommerce stores.
But What About The Nexus?
Many states have tax collection rules around a “nexus”, meaning if your business has a physical presence in the state, your company is considered as “doing business” in the state and therefore required to collect taxes.*
Examples of activities that can define a “nexus” vary from state to state, but something as simple as paying for warehouse storage or fulfillment services in a state can qualify as a “nexus.” That, in turn, means you’ll have to collect and file sales tax.
So, if you hire a full-time staffer who lives in California, or you pay a warehouse company in Texas, that could be considered a “nexus” and force your company to collect taxes.
*As of this writing in 2021, Montana, Oregon, New Hampshire, and Delaware do not have nexus laws.
Do State Authorities Know Your Company’s Sales Volume, Order Volume, or Operations Well Enough To Make You Collect Sales Tax?
To the best of our knowledge, US state taxing authorities have almost no idea about:
- Who is selling products online to the state’s residents
- What products are selling and what aren’t
- Which companies have a potential nexus (like a warehouse or a fulfilment operation) in their state
So, basically, the answer here is probably a big fat NO. In our experience, each state’s taxing authority has almost no idea how much tax they are missing out on, nor do they have any idea about most company’s “nexus.” As a result, many states rely on business owners to self-report, or they use 3rd party data.
How Much Do You Have To Worry About Sales Tax?
If you’re a smaller online retailer selling less than $100k of product per year per state, you’re probably not going to worry at all about sales tax. Other than the local taxes, you should be OK.
But if your store is selling more than $100k per year into any states other than your own, your store may be liable to collect sales tax. And if you’re a big Fortune 500 selling millions a year? Go ahead and register all those tax licenses.
What’s The Easiest Way To Collect Sales Tax?
There are tools like Avalara and Taxjar that will collect and remit sales taxes. They will connect with your existing website, calculate taxes on every applicable order, and then file and pay tax bills.
There’s also a free sales tax collection system from the Streamlined Sales Tax group that will collect and remit sales tax. You just have to sign up.
Food For Thought
- Sales taxes are always due if your customer is in the same tax jurisdiction as your store.
- Accountants and lawyers always seem to err on the side of caution – they’d rather tell you to collect tax than tell you that you may or may not be required.
- State taxing authorities don’t seem to have any clue about which websites are selling products to their residents, so it would be highly unlikely a state tax collector would demand sales taxes from most websites without some other information.
- The more sales and order information you share with companies or organizations like Avalara, TaxJar, Shopify, the Streamlined Sales Tax Group (SSTG), etc., the more likely a state tax collector could know your company’s sales and order volume.
- It’s relatively easy for state tax authorities to figure out if your company has an office or staff in their state.
Sales taxes are an important source of revenue for state and local govt. However, collecting them can be costly and inconvenient. While there are tools like SSTG that try to make the process painless, there may be risks with sharing sales data with companies in the sales tax collection industry.
Finally, we’re not lawyers or tax experts, we can’t speak to liability, and we aren’t advising anyone about how to deal with sales tax. Be sure to check the thresholds in every state against your sales and follow the rules in whatever tax jurisdictions your company has a nexus in.