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Do I Need To Collect Sales Tax For Selling Online?

Do I Need To Collect Sales Tax For Selling Online?

In this article, you will learn:

  1. Do I Need To Collect Sales Tax For Selling Online?
  2. FAQs

Selling online is just like selling products through a brick-and-mortar store. However, you may or may not have to collect sales tax for selling merchandise online.

This is because collecting sales tax on your online sales is subjective and depends on various factors. For instance, if you have a physical or economic nexus with a state/region as a retailer selling goods through your e-commerce store, you would be obligated to register with that state’s sales tax authority and calculate, collect, report, and remit sales tax to the state.

However, if you are an online retailer selling merchandise solely through a marketplace facilitator, the marketplace facilitator is responsible for calculating, collecting, remitting, and reporting sales tax to the state sales tax agency.

Further, if you are selling both on your online retail store as well as through a marketplace facilitator, you would be obligated to collect, remit, and report sales tax on sales made via your online retail store.

Likewise, certain states do not charge tax on online sales and exempt certain items from sales tax. Therefore, in what state are you selling products online, whether you have a nexus with a state you are selling goods into, if you are selling through a marketplace facilitator, and various other factors decide whether you need to collect sales tax when selling online.

Are you the online retailer asking the question ‘Do I need to collect sales tax for selling online?’ Do not worry as we’ve got you covered. In this article, we will let you know everything about collecting sales tax for online sales.

Do I Need To Collect Sales Tax For Selling Online?

There are a host of factors that decide whether you should be collecting sales tax for online sales or not. To help understand this better, let’s take an example here.

Mark is a Shopify store owner selling stationery online and having a place of business in the NewYork.

In addition to selling stationery items from his online store by the name of ‘Pallette and Paper’, he also sells stationery under this label on Amazon across various neighboring states such as Connecticut, Massachusetts, etc.

He has sold more than 200 retail items via ‘Palette and Paper’ and has gross receipts of more than $250,000 from sales in Connecticut in the last 12 months from his quarterly sales tax liability period.

Apart from selling stationery items, he also sells newspapers and current United States and Connecticut flags.

Taking this as an example, let’s examine the factors that decide sales tax collection for online sellers like Mark.

Want to know how sales tax works for online store owners like you?

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1. See If You Have Nexus With A State Or Region

One of the most important factors to answer the question, “do I need to collect sales tax for selling online”, is having a nexus with that state or region.

What Is A Nexus?

A nexus is a connection between a seller and a state’s tax agency. Having a nexus with a state’s tax authority decides whether the seller is obligated to collect sales from his sales in that state and remit the same to the state’s tax agency.

Accordingly, the seller first needs to establish a nexus with a state to be able to charge sales tax on merchandise sold to customers in that state. Additionally, a seller can be in a physical or economic nexus with a state.

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1. Physical Nexus

You as an online seller are in a physical nexus with the state if you have a physical presence or maintain a place of business in that state. Each state across the US has its own rules for defining physical nexus. You at least have a physical nexus with the state in which you are currently located.

However, many states have a much broader definition of physical nexus. For instance, you may be in a physical nexus with a state even if you do not maintain a place of business. This could be the case if you solicit business from that state through district or indirect representatives, the distribution of advertising collateral such as catalogs, or using newspapers, television, and other advertising media.

Let’s take Mark’s case to understand the rule of physical nexus. Mark is based out of New York City. Since he maintains a place of business in New York, he has a physical nexus with the state. Accordingly, he needs to register with the New York’ Department of Taxation and Finance, obtain a sales tax ID, collect sales tax on items sold to customers through his online store ‘Pallette and Paper, and report, and remit sales tax to the department.

Also Read:

New York Sales Tax 2023 For Businesses: A Complete Guide

Connecticut Sales Tax Laws: A Complete Guide

Massachusetts Sales Tax 2023 For Businesses: A Complete Guide

2. Economic Nexus

You as an online merchant are in an economic nexus with a state even if you do not maintain a physical place of business but cross the threshold for the number of items sold or the amount of sales set by the state. You are in an economic nexus with a state based on your economic activity with the state despite having no physical place of business in the state.

Accordingly, you may be an out-of-state or remote seller for a particular state and still be obligated to calculate, collect, and remit sales tax to that state’s sales tax authority, provided to cross the threshold of sales, number of transactions undertaken, sales made through a marketplace facilitator, etc set by the state for triggering economic nexus.

There is no fixed definition for economic nexus across all the states of the US. Therefore, you will have to check with each state’s sales tax laws and agencies to know if you have reached an economic nexus with any state.

Generally, the economic nexus definition across various states includes the following:

a. Factor Nexus

Factor nexus considers the extent of your economic activity in a state based on a host of factors. These include the amount of sales undertaken, the amount of property held, and the payroll paid. You as a merchant have a factor nexus with a state if you meet the threshold set by the state.

In our example above, Mark has sold more than 200 items via ‘Palette and Paper’ and has over $250,000 in gross receipts from Sales in the neighboring state of Connecticut. Let’s have a look at the economic nexus rules for out-of-state or remote sellers in Connecticut.

As per Connecticut’s sales tax laws, out-of-state or remote sellers are obligated to register with the Department of Revenue Services (DRS) Connecticut and obtain a seller’s permit if:

  • The retail sellers sell 200 or more items in Connecticut and have at least $250,000 in gross receipts from sales in Connecticut. Provided such sales are during the 12-month period that ends on September 30 immediately before the monthly or quarterly period for which sales tax liability is determined.
  • Remote sellers must also register with the DRS if they regularly solicit sales from Connecticut via advertisements such as billboards, distribute flyers, and catalogs, or advertise by print, radio, or television or via mail and other means of communication.

Considering Connecticut’s sales tax rules for remote sellers, Mark must register with the DRS, obtain a seller’s permit, and collect, report, and remit sales tax to Connecticut. This is because he is clearly in an economic nexus with Connecticut given his sales exceed the threshold set by the DRS that obligated him to collect and remit sales tax to the state.

b. Transaction Nexus

A state may require merchants to register with the state sales tax authority and collect sales in the state if these merchants sell a specific number of items set by the state that may trigger economic nexus with the state.
In our example above, Mark has sold more than 200 items via his online store ‘Palette and Paper’ in the last 12 months in Connecticut. This triggers economic nexus with the state for ‘Palette and Paper’ and as a result requires Mark to register with DRS and collect and remit sales tax to DRS on the sales done via Palette and Paper in Connecticut.

c. Affiliate Nexus

Affiliate nexus establishes a relationship between the state and a merchant if the merchant is an out-of-state seller who has affiliates in that state selling business products of the merchant in that state on a commission basis.

d. Cookie Nexus

If a merchant uses cookies to track website visits, it could lead to the digital presence of the merchant in the state and trigger economic nexus. As a result, the merchant would be obligated to register with the state’s sales tax agency and calculate, collect, and remit sales tax on sales from his online store.

e. Click-Through Nexus

This is a type of nexus that a merchant establishes with a state if his affiliates in that state refer him to business through online advertisements or online links. Let’s say Mark has an affiliate in Connecticut. The customers click on the affiliate’s link which directs the customers to Mark’s website Palette and Paper. In case the sales take place, there is a sufficient connection between Mark’s online store and Connecticut, which may trigger an economic nexus.

f. Marketplace Facilitator Nexus

Marketplace facilitators provide a platform to merchants and agree to sell merchant products by charging a fee. As per the marketplace facilitator laws, the marketplace facilitators and not the merchant sellers are required to calculate, collect, report, and remit sales tax on the sales done through the facilitator’s platform to the respective states. Check the next section for more details on Marketplace facilitator nexus rules.

Read:

2. Check The Marketplace Facilitator Rules

Another factor that answers the question “Do I need to collect sales tax for selling online” is the marketplace facilitator rules of the state you are selling into. To understand how marketplace facilitator rules work, let’s first have a look at some basic definitions.

What Is A Marketplace Facilitator?

A marketplace facilitator is an entity that facilitates sales of merchandise by marketplace sellers by providing a platform on which such sales are undertaken by the marketplace seller. The platform could be a website, a shop, a store, or a similar platform that accepts offers for sale and accepts the payments made by the customers to the marketplace sellers for the merchandise sold by them. Some of the marketplace facilitators include Amazon, eBay, Walmart, etc.

In our example, Amazon is the marketplace facilitator that is providing a platform for Mark to sell stationery under the label Palette and Paper, list his stationery items on Amazon, and sell these items via Amazon. Amazon collects the price for the items sold by Palette and Paper and remits the amount to Mark, after deducting fees and commission.

What Is A Marketplace Seller?

A marketplace seller is a person agreeing with a marketplace facilitator as per which the marketplace facilitator agrees to sell merchandise of the seller via the facilitator’s platform.

What is worth noting here is whether:

  • you are solely selling your goods via a marketplace facilitator
  • selling goods both via a marketplace facilitator and your online store
  • selling goods only through your online store.

Through what online channels do you sell goods also decides your sales tax liability.

Online Channel Type Decides Your Sales Tax Liability

a. Selling Goods Via Marketplace Facilitator Only

Let’s say a merchant sells goods only through a marketplace facilitator like Amazon. In such a case, it is not the merchant’s responsibility to collect and remit sales tax to the concerned state’s sales tax agency.

As per the marketplace facilitator laws, merchant sellers selling merchandise via marketplaces are not responsible for collecting sales tax from customers and remitting the same to the states.

Rather, the marketplace facilitator is obligated to calculate, collect, report, and remit sales tax to the states where the facilitator reaches a nexus and is obligated to register with the state’s sales tax authority.

b. Selling Goods Both Via Marketplace Facilitator and Own Online Store

Let’s take Mark’s example here. Mark is selling stationery both via his online store ‘Palette and Paper’ and the marketplace facilitator (Amazon). In this case, Mark is obligated to calculate, charge, collect, report, and remit sales tax on stationery items sold via Palette and Paper online store.

Accordingly, he is obligated to register with states’ sales tax agencies where he is selling stationery to customers (such as New York, Connecticut, and Massachusetts), obtain the sales tax ID, and collect sales tax from customers in these states. Further, he is required to remit the sales tax and file a sales tax return to the state’s sales tax agencies for the sales done via his online store Palette and Paper.

However, Mark has no responsibility for collecting and remitting sales tax on sales done via Amazon. As per the marketplace facilitator laws, it is Amazon who is obligated to register with the concerned states’ sales tax agencies, and collect, and remit sales tax on behalf of merchant sellers like Mark whose goods are sold via the facilitator’s platform.

c. Selling Goods Via Own Online Store Only

If you are a merchant selling goods solely through your online store, you must first check for the nexus you have established with various states. If the sales done through your online store trigger nexus with various states, you are obligated to register with the sales tax authorities of these states. Further, on obtaining the sales tax ID, you need to charge and remit the sales tax collected to these state sales tax agencies.

Read:
Do You Need A Sales Tax ID To Sell On Shopify?

3. See If Sales Tax Is Applicable In The State Or Region

There are certain states where there is no state-wide sales tax. These include Alaska, Delaware, Montana, New Hampshire, and Oregon. Since these states do not have a state sales tax, they do not have any state sales tax nexus laws. However, certain local jurisdictions or municipalities within these states have sales tax laws and nexus rules that may apply to you as an online merchant.

Accordingly, you as an online merchant may be obligated to register with municipalities where you meet the economic nexus rules and may be obligated to collect and remit sales tax to such municipalities. Let’s take the example of Alaska to have a better understanding of how sales tax applies in municipalities in states where there is no state-wide sales tax.

Alaska: A Home Rule State For Sales Tax

Alaska is a home-rule state. This means that it does not have a state-level sales tax. However, certain municipalities within Alaska charge a destination-based sales tax rate if a seller establishes a nexus with Alaska.

Accordingly, there are certain jurisdictions or municipalities within Alaska where the sales tax is applicable and have their economic nexus laws.

If you are a remote seller in one of the jurisdictions of Alaska, then you can use the Alaska Remote Seller Sales Tax Commission’s Uniform Tax code to register with local jurisdictions and municipalities.

The Alaska Remote Seller Sales Tax Commission passed a uniform code that municipalities within Alaska can choose to adopt. As per this sales tax code, the remote merchants and online facilitators are required to collect and remit sales tax if

  • The remote seller’s state-level sales, including the seller’s marketplace facilitator state-level gross sales exceeds $100,000 or
  • The remote seller, including the seller’s marketplace facilitator, undertook 200 or more separate sales transactions whereby they sold property, goods, and services in the state of Alaska.

Thus, municipalities adopting this uniform sales tax code require merchants meeting these criteria to register with them and collect and remit sales tax to them. Thus, you need to check with a local tax professional to know if you need to collect and remit sales tax in such home rule states.

Read:
Alaska Sales Tax 2023 For Businesses: A Complete Guide

4. Selling Taxable vs. Exempted Goods

Another factor that answers the question “Do I need to collect sales tax for selling online” is whether you are selling taxable or exempted goods. Selling taxable goods makes you as an online merchant liable to collect and remit taxes to a state you establish a nexus with.

However, each state provides a list of goods that are exempt from sales tax. Therefore, you must check with a local tax professional or the sales tax agency to know if the goods you are selling online are taxable or tax-exempt. Typically, the following items are tax-exempt across various states in the US where:

  • the buyer of goods is a registered vendor and is buying items from you as an online merchant for resale purposes. In such a case, you as a seller must obtain a Sales Tax Resale Certificate from the buyer and maintain it as evidence that such a sale was tax-exempt due to reasons mentioned on the certificate.
  • goods are sold to organizations exempt under section 501(c)(3) of the Internal Revenue Code and the agents of such organizations. These typically include charitable companies and non-profit organizations.
  • sales made to government agencies, etc.

FAQs

1. Do I Need To Collect Sales Tax In Every State?

You will need to collect sales tax in states with which you have reached a nexus. You will at least collect sales tax in your home state as you have a physical presence in your home state. Additionally, there are some states like Alaska where you do not have a state-level sales tax.

However, you will be obligated to collect and remit sales tax to local jurisdictions and municipalities within Alaska which have their own nexus rules.

2. Do I Charge Sales Tax For Out-of-State Customers?

You are a remote seller if you are located in one state and selling goods to customers located outside the state. In such a case, you need to collect sales tax for out-of-state customers if you have a nexus with such states. Further, sales are taxed on a destination basis in case of sales to out-of-state customers. That is, such sales are taxed at the sales tax rates applicable in the destination where goods are delivered to the customers.

However, if you do not have a nexus with such states, you need not collect any sales tax on sales to such out-of-state customers.

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