Sales Tax 101 For Online Entrepreneurs


Sales tax is one of the most critical things for online entrepreneurs. We used to live in a world where sales tax only applied to the offline world, but that has changed recently with economic Nexus laws, so you have to be aware of how these changes can potentially affect you. It has made running an online business more complicated, but like anything else, you can navigate this road successfully to have a great company.

Sales Tax

About 45 states in the country have sales tax. As an entrepreneur, you essentially collect the sales tax from the customer and pass it through to the government. However, it can be difficult for managing sales tax because every state will have its own tax. The percentage you pay varies widely from one state to the next. Each state also has its own amount of tax you must pay and their own schedule for doing it. It is also more complicated by the fact that each state would decide what products need a sales tax and which ones don’t. It can become a minefield if you are operating a large e-commerce operation that requires you to pay a lot of sales tax.

Complexities for Online Businesses

Running an online business is difficult enough, but it has gotten harder with the appearance of Nexus laws. States were angry that they weren’t able to collect sales tax from online companies, so they came up with a way of doing it. However, the states had to work together to make sure that every state was able to collect sales tax from these online companies. With these Nexus laws, collecting sales tax has become a very difficult thing for online businesses. It has made running a business that much harder, and it can cause you a lot of harm if you aren’t careful.

The most important thing that you need to understand about sales tax is the type of Nexus you have in the state. Fortunately, these laws only apply to the larger e-commerce companies, but you should be careful, so it doesn’t sneak up on you. A physical Nexus is considered to have a bona fide existence in the state. For example, you own a storefront or a warehouse in the state. Owning such a property would be considered having a physical Nexus, and it would make it clear that you have to pay sales tax no matter the size of your e-commerce operation. However, economic Nexus is a bit different. It is different depending on the state, but it generally requires you to meet certain transaction numbers or income thresholds. Once you have surpassed those numbers, it is incumbent on you to make sure you are in compliance with the relevant laws.

Collecting and Paying Sales Tax

The great thing about having an online business is how easy it is to record digital transactions. There are a whole host of tools that allow you to catalog and organize your transactions quite easily. You can use these types of tools to help you figure out where your sales are coming from. You can also use databases to group orders from the same states together, so you can see whether you will need to pay sales tax or not. You can also integrate various accounting tools into your e-commerce workflow, so you are automatically calculating how much tax you will need to pay. By doing things this way, you will end up doing less work for the same results.

What Is Economic Nexus?

The major thing about this type of Nexus is that it will vary widely depending on the state. You have to figure out what the transaction number is for all 45 states. You also need to figure out whether the states have income thresholds or not. This is where having a good resource will help you out.

Dealing with Sales Tax Laws for Each State

It is recommended that you get a good tax lawyer and accountant to help you get things right. This is something you can do once your business grows to a certain level. The good thing about e-commerce is that you don’t have to worry about these laws until you have hit a certain level of revenue, but it will be dependent on the state, so you should consider that when doing your accounting.

Paying Sales Taxes

Paying sales tax is generally the same thing as paying personal income tax to your state. You are required to file and pay monthly or quarterly or yearly. It will depend on the state you are in and the revenues you have. Once again, you must get a good tax accountant to help you stay compliant with the relevant laws for that state. However, you will almost always pay taxes in the state where you have a physical Nexus. This is why you should focus on getting those taxes sorted out before you start anything else.

Getting Compliant with Regulations

Getting compliant with the relevant regulations is no easy task. There are two main ways that you will be able to get compliant. These ways will vary depending on what your budget is and the size of your e-commerce operation. However, there is a method for everyone, so you don’t have to worry about not complying with the latest laws.

Easiest Way to Stay Compliant

The easiest way to stay compliant is to hire a professional tax attorney who will help you stay up-to-date with the latest regulations. An experienced tax attorney and accountant will have excellent knowledge of the laws, and you won’t have to do a thing but give them all your information. It is an easy and hands-off way of paying sales tax, and it is the recommended method for companies that make a lot of money.

If you don’t have a lot of revenue, it can be worth your while to have software do the job for you. However, it will be up to you to make sure that you are still compliant with the relevant laws. You also won’t have the one on one help that having a license tax attorney will provide. You also won’t have someone who will answer your questions whenever you are in a bind. The option you choose will depend on your revenues and your goals.