This guest post is from our friends at Zentail.
The phrase “sales tax” still makes many sellers shudder—and for good reason. Ecommerce sales tax can be as complicated as navigating an Ikea manual; there are pages and pages of ambiguous instructions that need decryption before you can tell what it is that you need to do.
To help, TaxJar CRO Ryan Thompson joined integration partner Zentail for an “Ask the Ecom Experts” interview. In this video, he addresses the most frequently asked questions by sellers today and how to best handle sales tax for your business.
What is the Difference Between Economic and Physical Nexus?
Before 2018, you only had to keep track of physical nexus. This meant that you didn’t have to collect sales tax unless you had physical presence (employees, warehouse, office, etc.) in a state.
South Dakota v. Wayfair, Inc, changed that. Now, you need to watch out for economic nexus in addition to physical nexus. States can set their own thresholds—either dollar amount, number of transactions or both—for when sellers are obligated to collect sales tax.
Beyond this, states can determine how far back this threshold applies. For example, some states like Pennsylvania look at a trailing 12-month period, while others like New Jersey look at the year to date.
Nearly all 50 U.S. states now have their own economic nexus laws. Keep in mind that economic nexus didn’t eliminate physical nexus. You could be answerable to both.
“We were in a position where we could see all of [our sellers’] transactions and basically use that data to help them understand where they now have economic nexus…we could say, ‘Hey, you’re 80% of the way there’…Outside of having tools like that or the ability to download your transactions by state into a spreadsheet and do some manipulation to figure it out, there still is no easy answer. It’s still a very unfair problem that these merchants have been faced with.” (4:00)
What Happens If You Don’t Comply?
The reality is that not all sellers are regarded the same. If you’re only doing a few thousand dollars of sales in a state, then the chances of the state auditing your business for compliance is far less likely than if you were doing millions of dollars in sales.
“So a merchant that has an exposure of 100 bucks—maybe a couple of hundred bucks—if I’m in their shoes, I would probably say, “I don’t know if that compliance is worth my time right now. I’m willing to take the risk.” (6:18)
The question to ask yourself is, what is your risk tolerance? Would you rather spend the upfront effort in making your business compliant, or pay penalties (taxes owed, plus interest) out of pocket if you were to get flagged?
You’ll want to set your risk tolerance and assess where you’re approaching it. Focus on those states first, and always be compliant in your home state. If you’re running your business out of a certain state or have inventory stored somewhere, as examples, then there’s no excuse not to be compliant.
What Is the Marketplace Facilitator Act?
Following the Wayfair ruling, marketplace facilitator laws were passed in multiple states requiring marketplaces like Amazon and eBay to collect and remit taxes on behalf of their third-party sellers. These laws benefit two parties: the state, which doesn’t have to monitor as many entities for compliance; and sellers, who no longer carry sales tax obligations on their own.
That being said, sellers aren’t exempt in situations that involve a 3PL, independent warehouse or shopping cart like Shopify. In these instances, you’re still required to abide by economic and physical nexus laws on your own.
“The definition of a marketplace is largely around the sale. So if you’re listing a product with other merchants on a place where buyers can buy, that’s where the marketplace facilitator rules apply.” (10:48)
Also, some states may not require Amazon to collect sales tax on your behalf. Even if you only sell through Amazon or only fulfill through FBA, you’ll have to watch out for these exceptions. These include “shipped to” states and any locations where you have physical nexus through an FBA warehouse.
It’s up to you, the seller, to figure out which parts of your business are covered by marketplace facilitator laws, and which are not. It’s highly likely that you’re dealing with a combination of both.
How Much Sales Tax Should I Be Charging My Customers?
In most states, this is determined by the “ship to” location. These states are called “destination-based” states. Your tax rate there is adjusted according to where the buyer takes possession of your item. So, if you’re selling out of Columbia, South Carolina, to a customer in Chesterfield, South Carolina, then your tax rate is whatever the city of Chesterfield requires (8% in this case, which includes a 6% state rate plus a 2% local tax).
However, there are also “origin-based” states where your tax rate depends on where you, the seller, is located. There are only 11 states that are currently origin-based. Among these, California is unique and enforces both origin- and destination-based taxation.
Note that this information should be used to determine the tax rate to charge buyers in your home state only. If you’re a remote seller selling into a state, then there’s a different set of rules that you have to pay attention to.
What Are Some Common Mistakes that Sellers Make?
The number one mistake that you could make is to collect tax but not remit it to the state. That’s fraud and it could land you in jail. So, you’ll want to make sure that you’re registered for a sales tax permit before collecting sales tax.
Beyond that, many of the common mistakes that sellers make are much more manageable. They usually involve not knowing where you have tax obligations, calculating the tax rate incorrectly or forgetting how certain product categories come with their own stipulations.
“The scenario that we don’t want to see sellers get into is the surprise of, “Hey, I sold millions of dollars of sales in a state, and I just haven’t collected yet.” Because then when the state says, “Hey, you owe us $100,000,” the merchants aren’t gonna go back to the [buyers] to collect that sales tax. That’s gonna come out of pocket, and that’s a problem.” (18:24)
Some categories, like food, are very nuanced. For example, certain ingredients in food could trigger different taxability rules. As another example, clothing priced under $110 isn’t taxable in New York. But once it goes over $110, then it’s considered a luxury item, which is considered taxable.
It’s easy to lose track of all the moving parts, especially if you have a diverse catalog and/or sell on multiple channels. That’s why most sellers turn to an expert or software like TaxJar for help—tax management can get really stressful, really fast.
How Can TaxJar Help?
TaxJar’s intuitive software simplifies tax management. With AI-powered tools, like Emmet, TaxJar can calculate sales tax in real time, keep up with ever-changing regulations and automatically submit returns to the states where you’re registered (among other solutions).
We also have an in-house team of researchers and sales tax experts who are checking the rulebooks day in, day out.
“There’s something like 14,000 different sales tax jurisdictions in the U.S., and those change all the time. So, every month, we’re monitoring all of the rules by state and making sure that our technology keeps up with those changes.” (13:51)
Those 14,000 jurisdictions include state, county and special districts that all layer their own rates on top of the other to create the combined sales tax rate. As mentioned previously, there are many other factors that can affect your tax obligation.
TaxJar stays on top of those, and provides a way for you to accurately calculate your taxes without losing any sleep.
The rules around sales tax are always changing. As tedious as they are, it’s important for you to know these regulations well and to have a system in place for determining your tax obligations across various states.
In any case, sales tax should never be a reason why you avoid selling in a state. Solutions like TaxJar exist to make your job easier, and to save you the hassle of figuring this out on your own.
“Where this should go is that sellers should be able to sell what they want to sell, where they want to sell it, and then let technology go figure out what is the right way to handle the taxes. I think the unfortunate piece is, the states aren’t going to necessarily make this easier. The good news is, there are ways to do this with technology to make it go away.” (20:59)
Have more questions about sales tax? Leave your questions in the comments. And explore more expert interviews and insights on marketplace selling on the Zentail Insider blog.