America is not known for our American Dream because we back down at the first sign of a struggle. While pundits bemoaned the closing of small businesses and even large brick and mortar chain stores all over the country during COVID-19, business owners didn’t wait around.
And for many, that meant taking a bold step and switching from purely in-person sales to going online.
Whether it’s a restaurant offering curbside and delivery for the first time or a retailer starting their first online store, more businesses than ever are now offering eCommerce options.
Selling online can be a big change for a business owner accustomed to selling face to face. And one of the things that changes quite a bit is how to handle sales tax. From which customers to charge, to what amount to charge to how to go about filling out a sales tax, sales tax is different when selling online.
Here’s what brick and mortar businesses-turned-online sellers need to know about the differences between charging sales tax in-person and online.
New to collecting sales tax or need a sales tax refresher? Check out our Navigating Sales Tax Compliance eBook.
Your Physical Location is No Longer the Point of Sale
Sales tax is generally made up of a state sales tax rate plus local sales tax rates. For example, the state sales tax rate in Georgia is 4% as of this writing, and then local counties, cities and other special taxing districts can add additional taxes onto that 4% rate.
If you own a brick and mortar store in Scottdale, Georgia and a customer comes in to buy a taxable item from you, you’d charge them 8%. That’s the 4% Georgia state sales tax rate, plus the 3% DeKalb County rate and the 1% DeKalb County TSPLOST (special taxing district) rate.
However, if you own that brick and mortar store in Scottdale, Georgia but also sell online to a customer in Warner Robins, Georgia then you’d be required to charge sales tax, but only the 7% Warner Robins sales tax rate.
Wait, what’s going on here?
The correct sales tax rate to charge is determined by the “point of sale.”
When selling in person, the point of sale is wherever you hand the item to the customer. For this reason, if you sell from a fixed location like a store, then you’d charge every customer the same sales tax rate.
But when selling online, the point of sale is the customer’s shipping address. This is where they take possession of the item. Therefore, when selling online you generally charge sales tax at your customer’s address.
As you’ve probably already guessed, this gets tricky since state sales tax rates can change from city to city. It’s also impossible to tell just by looking at a street address exactly which of the US’s more than 14,000 taxing jurisdictions your customer’s address falls into.
Important note: While online sales tax should be charged using the sales tax rate at your customer’s address in the vast majority of cases, there are a few exceptions. You can read about “origin-based states,” where your in-state location is still considered the point of sale, here. Keep in mind that “origin-based” sales tax only applies if you are selling to a buyer in your home/headquarters state.
There’s good news here! Depending on how you’ve chosen to sell online, the online platform you’ve chosen – whether it’s a full service platform like BigCommerce or an ERP like Acumatica – your online solution likely has a sales tax collection engine. However, you will need to be sure to tell your online sales channel in which states you want to collect sales tax. Don’t skip this step when setting up your online store! Forgetting to collect sales tax can result in a tax bill out of your pocket.
If you’re building your own online solution, TaxJar has your back. The TaxJar API provides the ability to connect with your eCommerce platforms, marketplaces, and carts in minutes and generate precise sales tax rates and calculations at the state, county, city and special taxing district level in real time.
You May Be Required to Collect Sales Tax from Buyers in Other States
As a brick and mortar seller, you are required to register for a sales tax permit and collect sales tax from buyers at your physical location. This is because a retailer always has sales tax nexus in their home state.
But as an online seller, you may find that you now have sales tax nexus in other states, too.
This is because of the concept of economic nexus. Most states have “economic nexus” rules or laws that state that a retailer who meets certain criteria in the state has sales tax nexus in that state and is required to collect sales tax from buyers in that state.
For example, non-California retailers – no matter where they are located – are required to collect California sales tax from buyers in California if that retailer makes more than $500,000 in gross revenue in that state during the previous or current calendar year.
For most states, the threshold is even lower. In states like Illinois and Indiana, retailers who make more than $100,000 in gross revenue per year or who make more than 200 sales into the states each year are required to collect sales tax from in-state buyers.
This means that if you start selling online and your online sales quickly grow, you may find yourself on the hook to register for a sales tax permit and collect sales tax from buyers in more states.
In the worst case scenario, you achieve sales tax nexus in a state without realizing it and are on the hook to pay sales tax out of pocket once the discrepancy is discovered.
So are you supposed to login to your bookkeeping solution and start counting the number of transactions you’ve made to buyers in each state?
There’s a better way. TaxJar’s Economic Nexus Insights Dashboard shows you if your business has economic nexus in a state. We will also show you if your business is approaching economic nexus in a state so that you can be prepared.
TaxJar integrates with all of the shopping carts and marketplaces on which you sell. We keep up with every state’s economic nexus threshold. This includes nitpicky differences such as whether nexus is determined by “previous calendar year” or “previous twelve months.” This way, nexus never sneaks up on you and you never owe sales tax out of pocket.
Sales Tax on Shipping Charges is a New Reality
When you sell a product in your brick and mortar store, your customer walks out with their purchase in hand and the sale is complete. But when you sell an item online, there’s the whole separate issue of getting the product to your buyer.
This generally involves packaging the item up and shipping it out to your customer. But there’s a wrinkle – more than half of US states require that you charge sales tax on shipping charges.
By shipping charges, states generally mean the price you charge your customer in order to ship the item to them. Say you charge a $2 flat shipping fee for all of the books that you sell. In a state where you have sales tax nexus and where shipping is taxable, you’d be required to include that $2 shipping charge in the total sales tax collected form your buyer.
Let’s look at some examples:
Example 1: You sell a $100 necklace to and charge $5 in shipping to a customer in a state where shipping is taxable. In this case, you’d charge sales tax on the $105 total of the item cost + the shipping charge.
If the sales tax rate is 5%, then you would charge your customer $5.25 in sales tax for a total of $110.25.
Example 2: But you sell the same $100 necklace and charge $5 in shipping to a customer in a state where shipping is NOT taxable. In this case, you would only be required to charge sales tax on the $100 price of the item. You would not charge sales tax on the $5 shipping charge.
So in this case if the sales tax rate was 5%, you’d charge your customer $105.00 in sales tax and then add the $5.00 shipping charge for a total of $110.
A quarter difference may not seem like much, but undercharging sales tax can mean that you have to pay out of your pocket when sales tax filing time rolls around. And overcharging can create a negative customer experience for customers who feel like they are being unfairly gouged.
Fortunately, most eCommerce platforms, including the TaxJar API, allow you to tell them whether or not you want to charge sales tax on shipping charges.
But, since eCommerce platforms generally do not provide guidance, we’ve put together a list of states that require retailers to charge sales tax on shipping. Be sure to click through and read about your individual state (or states). Each state has slightly different rules and laws when it comes to charging sales tax on shipping charges.
Filing Sales Tax Just got more Complicated
When you sell from a single location then filling out your sales tax returns is fairly simple. Login to your state’s sales tax filing system, find your location, and enter the amount of sales tax you collected over the filing period.
But when you begin collecting sales tax from buyers all over the state, or all over multiple states, sales tax gets trickier.
Keep in mind that states and local areas all use the sales tax you collected to pay for things like schools and fire departments. Because of this, states require that you break down how much sales tax you collected by state, county, city and other “special taxing districts” so they know how to allocate the sales tax funds you are sending their way.
If you made online sales and collected multiple sales tax rates, filing your sales tax return can quickly turn into a time-consuming headache. That’s why we created TaxJar.
TaxJar will connect with your online shopping carts and marketplaces, and break down all the sales tax you collected by county, city and more, and give you a report detailing just exactly what the state wants to see. And if you’d rather do anything else than file a sales tax return, we’ll even AutoFile your sales tax returns for you so you never have to handle a single sales tax filing ever again.
TaxJar handles sales tax so you can get back to the exciting prospect of transforming your brick and mortar store into an eCommerce store.
To Sum it Up…
Switching from selling primarily brick and mortar to selling online is filled with possibilities. But, as with any new business venture, there will be a learning curve. We hope this guide prepared you for what to expect with eCommerce sales tax!
Ready to automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.