7 Things You Need to Know About E-Commerce Sales Tax

In 2018, e-commerce sales tax changed dramatically. Previously, online retailers only had to pay sales tax in states where they had a physical presence. The Supreme Court ruling in South Dakota vs. Wayfair changed the landscape for many e-commerce sellers.

Since then, sellers must register and file sales tax returns in states with a physical presence or reach an economic nexus threshold. Economic nexus thresholds vary by state but are generally based on a transaction or revenue amount. 

This article will cover the seven essential things you need to know about e-commerce sales tax in the US.

1. What Is Sales Tax for E-Commerce?

Let’s start with some learning blocks. E-commerce sales tax applies to certain products sold online through your website or a platform you sell on. Your customer pays sales tax at checkout, and then, as a seller, you are responsible for collecting it and remitting it to the states if you’ve reached nexus.

Sales tax is generally a percentage of the price of an item sold. It is similar to the tax charged at a brick-and-mortar location. Keep in mind that each state has different sales tax rates and nexus thresholds.

2. Who Is Responsible for Paying Sales Tax?

Both the customer and the e-commerce company are responsible for paying sales tax in different ways. The customer must pay sales tax at checkout when they purchase an item. However, the e-commerce company must ensure they are collecting taxes correctly from each sale, file sales tax returns, and remit the taxes to the correct state.

For example, if your business is based in Florida and a customer from California purchases a good or service from your online store, they will pay California’s 7.25% sales tax rate at checkout. As the business, you are responsible for collecting the 7.25% tax and remitting it to California.

3. Be Aware of Sales Tax Nexus

As a business owner, nexus is something that can quickly sneak up on you if you aren’t tracking or managing your sales. It refers to a connection between two things. In the case of sales tax, it’s meant to refer to a retailer's connection with a state that requires them to collect sales tax from buyers in that state.

A retailer or online business can have either physical or economic nexus. Physical nexus occurs when you have a business presence in a state, such as an office, warehouse, or employees living and working there.

Economic nexus occurs when a business reaches a threshold for transactions or sales revenue. The economic nexus threshold in many states is $100,000 in gross sales or 200 separate sales transactions in a year. Some states may require a combination of both for businesses to register and file state sales tax returns.

Understanding the different sales tax thresholds is vital for your business. If you reach a threshold, you’ll need to register with the state’s Department of Revenue (DoR) or other similar department to be able to collect sales tax and file with the states.

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4. Each State Does Things Differently

As we mentioned, sales tax differs by state. This means that every state taxes products and services differently, and some products may not be subject to sales tax at all.

A great example is the sales tax on clothing and groceries. In Colorado, clothing is taxable, but groceries are not; in Hawaii, both are taxable.

5. You Must Register to Collect Sales

If you reach nexus in a state, you’ll need to visit your state’s taxing authority to register for a sellers’ permit before you can begin collecting taxes from customers. It’s generally called the “[State] Department of Revenue” but may go by another name, such as the Texas Comptroller or the California Department of Tax and Fee Administration (CDTFA).

To register for a seller’s permit in a state, you will typically need:

• Federal Employer ID Number (EIN) or Social Security Number (for sole proprietorships)
• Business legal name
• Activity start date for your business
• Contact number for business owner or representative
• Physical and mailing address
• Activity start dates, filing frequencies, and fiscal months for each tax type you are registering for

You might also need articles of incorporation or articles of organization, an SS4 (IRS Determination letter), and a corporate income tax return. Remember that this is not an exhaustive list of what you will need to register, and you may need to present other documents to the state when registering for a sales tax permit.

6. Not Filing Sales Tax Has Serious Consequences

Typically, businesses are required to file sales tax returns on a monthly, quarterly, or annual basis. When your due date arrives to file taxes, you must file and remit the taxes owed to the state. And if you sell across multiple channels, you must combine everything for each state and file them in one sales tax report.

So what happens if you don’t pay sales tax? The honest answer is that it depends on the state. Most states charge penalties and interest fees that can quickly increase your tax bill by thousands of dollars. In a worst-case scenario, you could face criminal charges and jail time.

7. Sales Tax Software Can Keep You Compliant

With all that’s at stake, sales tax software is the best way to ensure you stay compliant. The best software can handle nexus tracking, registrations, product taxability, filing, and remitting taxes to the states for you. This ensures you’re always compliant and won’t worry about monitoring nexus thresholds yourself.

Leave It to Zamp

Zamp is disrupting the sales tax market by putting our customers first. And it shows — we’ve been named a Major Player in the Small, Mid, and Enterprise SUT markets in IDC’s 2024 IDC MarketScape for Worldwide SaaS and Cloud-enabled Tax Automation Software, along with being featured in the top ten best sales tax software companies by taxtech500.

Our full-service platform allows businesses to outsource their sales tax from start to finish. Our platform manages the complete sales tax lifecycle by offering:

• Hands-off onboarding: We set up everything for you and ensure it’s done right.
• Full sales tax compliance service: We offer nexus tracking, registrations, roof-top accurate calculations, product taxability research, mapping, reporting, and filing. All this is included in our pricing model — one fee for everything.
• Proactive account support: We are always looking for any changes in requirements, and our team is happy to answer any questions you may have.

See how you can save time and stay sales tax compliant with Zamp. Book a call below!

About the author

Emily Kordys

Emily Kordys is a Content Marketing Manager with seven years of experience in the sales tax, auto, and real estate industries. She currently resides in North Carolina with her boyfriend and dogs, Shadow and Copr.