Way to go, eBay seller! You’re running a profitable online business.
But once your business really gets off the ground, it’s time to start considering sales tax. This is one of the most confusing subjects for a seller – who pays sales tax? How much do they need to pay? When do I have to turn it over to the state?
TaxJar has your answers! We have put together this nifty guide to make sales tax simple for eBay sellers.
Step 1: Determine Where You Have Nexus
When you sell a product on eBay, chances are you will have to deal with sales tax. The majority of U.S. states require merchants to charge sales tax, but only in states where you have “sales tax nexus.” Nexus basically means where you have a significant presence, like an office, a warehouse, a salesperson, affiliate or an employee. In some states, if you sell at a craft show that also constitutes nexus. The reason that states can have such a broad definition of nexus is because they use the sales tax generated to pay for things like schools and roads, so it is really in their best fiscal interest to collect as much sales tax as possible.
To give you an example, if you work in Florida, but you store your products in a warehouse in Alabama and you hire your sister in Georgia, you may find that you have nexus in all three states. The first thing you’ll have to do is determine where you have sales tax nexus, which means figuring out everywhere that you may have a physical presence and then calling that state’s Department of Revenue. Here is a map of state sales tax info to get you started.
Step 2: Register for a Sales Tax Permit
Great job! Now that you’ve found out where you have nexus, the next item on your list is to contact your state’s department of revenue and register for a sales tax permit. Every state is different. A few states charge you to apply for a sales tax permit, but many don’t. Some states will require you to renew your sales tax permit and others won’t. The one thing that most states have in common is that they generally require businesses to have this permit before collecting sales tax from customers, so definitely don’t skip this step.
When you register for your permit, your state will tell you when they want you to file. This can be monthly, quarterly or annually or even semi-annually. If you have multiple states where you have nexus, don’t be surprised if they all want you to file differently. We can’t stress enough that when it comes to sales tax, each state has different rules and regulations.
Step 3: Collecting Sales Tax
Now this is a tricky issue for eBay sellers, because eBay doesn’t give you an accurate way of knowing that you are collecting the right amount of sales tax. EBay’s tax collections is perfectly acceptable if you have nexus in a state that has a single tax rate. However, if you have nexus in a state that has a destination-based sales tax rate or have another reason to collect a variety of sales tax rates, like you sell products that are taxed at different rates, then you could get into trouble on eBay rather quickly.
Let’s look at Miranda’s issue. She thought she was collecting an accurate rate for the state of Wyoming. Yet, when she went to file her return she noticed that their eFile system said that she had not collected enough tax. Turns out that two of Wyoming’s counties have a higher rate than the others. Because eBay only allows for a single flat rate for that state, she hadn’t collected enough in those two counties. So Miranda ended up paying out of pocket.
So what is the answer when faced with this outdated collection system?
Answer: There is a way to change the rate that you want to collect for each state. Unfortunately, you can’t collect more than one rate per state at this time. So if you are finding that the standard eBay sales tax rate isn’t cutting it for your business, here is a short guide on how to update the sales tax rate using a sales tax table
- Contact the department of revenue in the state that you plan to change on eBay and gather the sales tax rate for that state. Be aware that this will include a state rates, plus usually one or more local rates.
- Sign into eBay and navigate to the My eBay page.
- Click on the Account tab and select Site Preferences.
- In the Payment from Buyers section, choose the Show link.
- In the Use Sales Tax Table Area, select the Edit link.
- Here is where you will put the information that you received from the various state department’s of revenue. Remember to also pay attention to shipping and handling tax, if your state requires it. You can select a box called, ‘Also charge sales tax on S&H’ if you need to collect sales tax on shipping.
- Select Save. Now eBay will collect based on your sales tax table when you make a sale. If you have nexus in more than one state, remember to repeat this process for each of them.
If you still don’t what rate to use, many sellers go with one of these three options:
- Some online sellers will simply charge their customers the highest sales tax rate in a destination-based state. This covers your bases in case a state ever says that you underpaid them. However, you can end up charging your customers more than they owe, which could upset them. Or you could become the target for a lawsuit for collecting too much sales tax, although this is unlikely.
- Some sellers charge a rate that the majority of buyers in a state should be charged. If they get a random buyer from a higher rate area, they simply pay the excess out of pocket.
- Lastly, your third option is to use eBay’s standard rate and then make up the difference out of your own money. However, this is really only a good way to go about it if you are paying a small amount of extra sales tax to the states. If you are paying more, it’s a good idea to go ahead and set up your sales tax tables.
Whatever you decide to do on eBay’s collection system, be sure to remit your sales tax collected back to the state. Despite their differences, all the states agree that if you collect sales tax and don’t give them 100% of the funds collected- you are operating illegally.
So back to the steps…
Step 4: Report on How Much Sales Tax You’ve Collected.
It appears you have a sales tax filing coming up and now you need to decide how much sales tax you have collected. Here is where things start to get tricky.
Under the Selling Manager Pro link on your My eBay page, you can print or download a sales report that can show what you collected in sales tax. Unfortunately, most states don’t just want the total that you collected; they want to know the break down by city, county or other taxing district.
Here is where TaxJar can help. It is really why it was created in the first place. TaxJar will pull in all the sales tax that you collected from each channel you sell on and arrange that data the way each state wants to see it. Without TaxJar, you’ll have to combine reports, spend hours researching which district a buyer lived in, and then even more time with the tax code lookup tables. With TaxJar, we can have all that done in minutes (without the headache.) Plus, if you sell on platforms other than eBay, you can pull in your sales tax collected there, too. No more trying to wrangle reports from multiple platforms!
Which leads us to…
Step 5: File Sales Tax
Now that you’ve figured out how much sales tax that you’ve collected, it’s time file that with the state. There are a few options: mailing your return in (outdated and time consuming), online file (easier and some states require it), or have TaxJar take care of it for you with AutoFile.
Using AutoFile, TaxJar will file and remit your sales tax returns for you. That way, after you are set up, you won’t need to do anything else. One of the nicer things about TaxJar, is that we will take advantage of any state sales tax discounts that you might be eligible for and send them back to you! We won’t let you leave money on the table.
One last thing to keep in mind is that some states require you to file a sales tax return even if you didn’t collect any sales tax. If you don’t file a ‘zero return’ you might get hit with a penalty.
Step 6: Now Kick Back
If you have followed these steps, you have sales tax nailed. Congrats! Now all you have to do is focus on running your store.
For a whole lot more about eBay sales tax, check out our eBay Sales Tax Guide. Still have questions about eBay sales tax? Start the conversation in the comments!