Editor’s note: New Year. New Challenges. While we’ve got you’ve covered with shipping, it’s fundamental as a retailer to have all things covered in ecommerce - right down to how to do tax right. We’ve invited subject matter experts – like Jennifer Dunn, Chief of Content at TaxJar, to share her top #TemandoTips. TaxJar is a fellow Magento premier technology partner.
The New Year brings with it the spirit of tackling tough tasks. One of those tasks is handling sales tax in your eCommerce business. The good news is, sales tax compliance is a whole lot easier than losing pounds or dropping that bad habit. Just follow the five steps to sales tax compliance and you can master this administrative hassle in 2018!
Step 1: Determine where you should collect sales tax
In the U.S., retailers (and this includes online sellers) only have to collect sales tax in states where you have “sales tax nexus.” Nexus is just a fancy way of saying a “connection” to a state.
Since sales tax is governed at the state level, each of the 45 U.S. states (plus D.C.) with a sales tax have slightly different rules and laws about what creates nexus. But in general, these factors create nexus in a state:
• A location (even if just your home office or kitchen table)
• A drop shipping relationship
• An affiliate
• Making sales at a tradeshow or craft fair
You can read what each state’s tax code says about what creates sales tax nexus here.
Step 2: Register for a sales tax permit (or permits)
When you have nexus in a state, your next step is to register for a sales tax permit to lawfully collect sales tax from buyers in that state. You can find instructions on how to register for a sales tax permit in every state here.
When you receive your sales tax permit, the state will also instruct you on how often to file a sales tax return and your sales tax return due date. This varies by state, so be sure to note it down!
States use the sales take retailers collect and remit to pay for budget items like schools, roads and public safety. How often you are asked to file sales tax generally depends on your sales volume. If you are a high-volume seller, states want you to pay monthly or quarterly. But if you are a low-volume or new seller, you may be asked to only file and pay sales tax annually. This will vary by state and your business case.
Step 3: Collect sales tax on all your sales channels
After you’ve received your sales tax permit, your next step to sales tax compliance is setting up sales tax collection on your sales channels. You can find guides to setting up sales tax collection on most online shopping carts and marketplaces here.
Do you charge your buyers for shipping? Keep in mind that some states require that you also charge sales tax on shipping costs that you charge your buyer. You can read more about sales tax on shipping in the U.S. here.
Step 4: Report the Sales Tax You Collected
Before you know it, your sales tax filing due date will roll around. At this time, you’ll need to calculate how much sales tax you collected from buyers in each state on all of your sales channels.
Reporting sales tax would be fairly simple if the complexity ended there, but most states also require that you break down your sales tax collected by city, county and special taxing district, too. This means going through your sales and determining where your buyer was located, if she lived in the city limits or outside it, and if you collected sales tax because your customer was in an educational, transportation, or other taxing jurisdiction. Yikes!
That’s where sales tax automation can help. With sales tax automation software, all you do is connect the shopping carts and marketplaces on which you sell one time, and you receive a return ready sales tax report showing you how to fill out your state’s sales tax filings exactly the way they want to receive that information.
Step 5: Automate Sales Tax Filing
And once you’ve figured out how much sales tax you collected in each city, county, and taxing jurisdiction, your next step is to file your sales tax return and pay the tax. Sales tax automation can help here, too. If you’d rather skip the step of filling out your sales tax return, automation will file and pay sales tax for you. Why automate? Sales tax is not profitable. If one of your New Year’s Resolutions is to save hours on hassles and spend more time on business activities that generate revenue, sales tax automation helps.
There are a couple more important things to remember when filing a sales tax return:
1) File on time – Be sure to file by the due date, because most states not only charge an approximately $50 penalty for late filing, they’ll also levy interest on the amount of sales tax paid late. Sales tax automation ensures you pay on time, every time. 2) Don’t discount sales tax discounts – About half the states with a sales tax allow retailers who file on time to keep a small (1-2%) portion of the sales tax you collected. This is a reward for filing and paying on-time. And a good sales tax automation solution will ensure that you keep the discount in your pocket when filing your return!
And that’s it – you have become sales tax compliant. Now, the only thing you have to do is file periodically. (Or you can automate the whole process and forget about sales tax compliance!) For a lot more information about sales tax, check out our Sales Tax 101 for Online Sellers guide, or join more than 8,000 online sellers and experts in our Sales Tax Community.
TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
Next up: Learn more on our guest with these #TemandoTips: Demystifying US Sales Tax on Shipping Charges