Magento Sales Tax 101

Magento Sellers Guide to Sales Tax

by Mark Faggiano

Magento sales tax

You made a smart move choosing Magento as your online shopping cart. Once you have the look and feel of your store set up and your products all ready for purchase, you’re done right?

Well, not quite. You still have to deal with the business side of your eCommerce business, and one of the trickier aspects of any online business is collecting and remitting sales tax.

TaxJar has you covered here. We’ve put together a Magento sellers guide to sales tax to walk you through everything you need to know about getting sales tax compliant so you don’t run into big trouble down the road.

Let’s get started.

Step 1: Determine where you have sales tax nexus

The first thing you need to know about sales tax is in which states you have to charge sales tax. Sales tax is governed at the state level, and for that reason, sales tax laws vary from state to state.

If you live and operate your business in one of the 45 states (and the District of Columbia) that levy a sales tax, then you have sales tax nexus (i.e. “significant presence”) in that state and most likely need to collect sales tax from buyers in that state.

But don’t stop there. States use sales tax revenue for things like schools, roads and public safety, and they have a vested interest in collecting sales tax on commerce within their borders. For that reason, many states consider that any number of business activities create nexus, including:

  • An office
  • An employee
  • A brick and mortar store
  • Storing inventory in a warehouse
  • An affiliate

Selling within the state, such as at a tradeshow or craft fair

If you have any kind of presence in a state, it’s best to check with that state’s Department of Revenue to determine whether or not they consider you to have sales tax nexus.

Click this map to find information about sales tax in your state:

Sales Tax Map

Once you’ve determined that you have sales tax nexus, your next step is to…

Step 2: Register for a sales tax permit(s)

Before collecting sales tax from customers, register for a sales tax permit with your state’s department of revenue (or other taxing authority.) Some states consider it unlawful to begin collecting sales tax from customers without a permit, so don’t skip this step.

Once you’ve registered for your sales tax permit, the state will tell you how often and when they want you to file a sales tax return. Most of the time they’ll want to hear from you either monthly, quarterly or annually. Be sure to note the dates that they want you to file. Since every state’s sales tax rules are different, you may end up filing quarterly in one state and annually in another.

Some states charge a small fee for a sales tax permit, while others do not. And some states require you to renew your sales tax permit periodically while others do not.

Once you’ve registered for a sales tax permit in the state or states where you have sales tax nexus, your next step is to:

Step 3: Collect sales tax

Set up sales tax collection in your Magento store to ensure that you collect the right amount of sales tax from buyers. Again, every state is different when it comes to sales tax collection and sales tax rates. Most states have a state rate plus county, city, or other local sales tax rates. The rate you charge will depend on whether you have nexus and are selling in an origin or destination-based sales tax state.

The easiest way to collect sales tax in Magento is with TaxJar’s Sales Tax Automation plugin.

This easy-install Magento plugin:

  • Sets up Sales Tax Collection Automatically
  • Configures Your Sales Tax Rate(s)
  • Supports Sales Tax Nexus in Multiple States
  • Accounts for Complex State Sales Tax Rules
  • Installs Easily into Your Magento Store’s Backend
  • Never Alters Your Customers’ Checkout Experience
  • Has No Set-up Fee

Click here to find out more and add the Sales Tax Automation plugin to your Magento shopping cart.

Keep this in mind: If you sell through other channels aside from Magento, you still must collect sales tax from buyers in every state where you have nexus. That means setting up Amazon, eBay, Etsy, PayPal, etc. so that you are collecting sales tax from buyers.

So you’re good to go, making sales and collecting sales tax. Here’s what to do first when your sales tax filing deadline looms:

Step 4: Report how much sales tax you’ve collected

Now it’s time to figure out how much sales tax you’ve collected from your customers in order to file your sales tax returns.

This is where sales tax starts to get complicated. While some states just want to know the total amount of sales tax you collected in their state over the taxable period, a majority of states want you to go farther than that. They want to know how much sales tax you collected from buyers in each county, city or special taxing district. If you try to calculate this manually, you can spend hours scouring each order and comparing it to your state’s sales tax tables in order to fill out your sales tax return correctly.

TaxJar makes sales tax reporting easy. We integrate with your Magento account (and other channels that you sell on), pull in all the sales tax you collected, and will prepare return-ready reports for you in the format that the state wants to see. No more spreadsheets and tax tables.

Once you’ve calculated just how much sales tax you’ve collected in each state, your next step is to…

Step 5: File sales tax

TaxJar will AutoFile your sales tax returns for you in some states! In states where we don’t AutoFile, we’ll provide you with a return-ready report so you can quickly and easily file online.

Here are a few more sales tax filing best practices:

Always file early or on time. Not only will you get a penalty for filing late, but there are also benefits to filing early. Many states will give you a sales tax discount if you pay on time. Don’t leave that free money on the table!

Also, many states want a sales tax filing from you even if you didn’t collect any sales tax over the taxable period. If your state requires one of these “zero returns,” be sure you always file. Even if you didn’t owe any sales tax, you can still receive a penalty for forgetting to file.

And after that…

Step 6: Relax!

Go add new products, grab a pizza or spend time with your family. You’ve put a lid on Magento sales tax!

We get that Magento sales tax can be raise questions. To network with other merchants, check out the Sales Tax for eCommerce Sellers Facebook group or Magento Sales Tax 101 eGuide. And if you have further questions, start the conversation in the comments!

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