A Small Business Guide to E-Commerce Sales Tax

by William Powell Writer/Educator

Over the past several years, e-commerce has dominated how businesses operate, fulfill consumer demand, and stay competitive. Small businesses used to get by with a limited or nonexistent online presence. But now, even the smallest enterprises have to consider this digital alternative to be successful. Many of the sales tax implications for e-commerce stores are similar to brick-and-mortar, but there are some notable differences to bear in mind to stay compliant and avoid costly liabilities. Here’s a quick guide on e-commerce sales tax for small businesses.

Understanding Economic Nexus

Before the landmark South Dakota v. Wayfair Supreme Court decision, businesses were only required to collect and remit sales tax in states where they had a physical presence, like owning a storefront.

The 2018 ruling introduced “economic nexus,” giving states the authority to include remote sales as criteria for creating a taxable business presence (i.e. nexus). Now, even if a company has no form of physical presence in a state, they may still have an obligation to collect sales tax. Furthermore, economic nexus thresholds and guidelines can vary by state. What’s taxable for a purchase made remotely in California may not apply to the same purchase made in New York.

How to Monitor Sales Tax Obligations and Comply

Remote sellers should regularly evaluate their sales and transactions by state from the previous and current calendar years to determine whether nexus was reached or exceeded. Most states follow benchmarks of $100,000 or 200 transactions in a calendar year, but the rules vary. An economic nexus calculator is a great tool to monitor areas where e-commerce sales tax obligations exist.

It’s not uncommon for companies to under collect or neglect to remit sales tax to the appropriate states. Rather than face expensive penalties and time-consuming audits, companies can leverage proactive strategies to mitigate historical sales tax liabilities. For example, a voluntary disclosure agreement, or VDA, is an arrangement with a state to limit penalties and look-back periods according to the conditions offered by the state.

Registering and Filing Sales Tax Returns

After determining where to collect and remit sales tax based on nexus, small businesses can begin to register in the appropriate states.

After a sales tax identification number is assigned in the appropriate states, companies can file monthly, quarterly or annual returns. Most states have additional tax obligations, which can affect the sales tax registration process, like income, franchise, or gross receipts taxes.

Before starting your compliance journey, assess every state and local tax implication for your business.

Get the Help You Need

Managing sales tax for your e-commerce business can be time consuming without the right tools or expertise. Utilizing a software solution to streamline sales tax calculation can reduce errors and optimize compliance efforts. But even with the right tech stack, handling the ongoing requirements, law changes, and nuances of multi-state sales tax may exceed your company’s bandwidth. Outsourcing sales tax compliance to trusted experts will ensure proper adherence to state and local tax requirements without overpaying.