5 Things You Didn't Know About Online Sales Tax
- Jul 12, 2015 | Laura McCamy
If you sell goods (and some services) online, it is nearly certain you will owe sales taxes to someone, somewhere. Whether you are selling on Amazon, integrating with a store solution like Shopify, or rolling your own code, life as an online merchant isn't without a learning curve. To help you out, we're come up with five things you might not know about online sales tax--but you should.
1. The many ways to create nexus
If you sell online and you don’t know about nexus, it will soon become your frenemy. Nexus is a physical connection that triggers an obligation for a seller to collect and pay sales taxes in a particular state. Nexus can happen in a variety of ways.
You probably know that you need to charge sales tax on orders you ship to customers in your home state. What you might not know is that you could have nexus in one or more other states. Drop-shippers, remote employees, and warehouses where you store goods are among the things that may create nexus in another state.
2. The difference between destination and origination sales tax
If you have nexus in one of these eleven states, the sales tax rate you charge your customers is the one charged at the location from which you ship your orders, or origin-based: Arizona, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia. You will charge the same sales tax rate on all your sales in those states.
If you have nexus in any of the other states that charge sales tax (except California--see below), you will need to know the tax rate for your customer’s address, because those states charge tax on online sales based on the destination to which you ship the order. Avalara’s free sales tax map and calculator can help you begin to untangle the welter of different sales tax rates within each state.
3. The California complication
Of course California has to be different. California sales taxes are mostly origin-based--but not completely. When you ship an in-state order, you will add city and county sales taxes based on your location and district sales taxes based on your customer’s location--the destination. As such, California is referred to as a"modified-origin" state.
4. The sales taxes in a state with no sales taxes
Alaska is one of five states in the US that doesn’t levy a state sales tax (the so-called NOMAD states). It is, however, the only one of those five that allows cities and counties to levy sales taxes. If you owe sales taxes in more that one Alaskan locality, you will need to file a separate return with each taxing district.
5. Use tax collection on the rise
Use tax is the cousin of sales tax. While sellers collect and remit sales taxes, use taxes are collected directly from the purchaser. If you buy an item online from a seller who doesn’t charge you sales tax, you technically owe use tax to your state.
In the past, extracting use tax from individuals wasn’t worth the price of collection (though businesses were expected to pay). As Internet sales take an increasing share of revenue from state coffers, many states are becoming more aggressive about collecting these taxes from individuals. California even has a form for residents to pay their use taxes along with their income taxes. Expect to hear more about use taxes in the future.
Are you tearing your hair out yet? A sales tax management service might be just the thing to save your scalp.