Dealing with sales tax as a US online retailer

(This blog was first published by OneSaas here)

If you are an e-commerce merchant in the USA, then it’s likely you need to deal with US sales taxes. This is a highly complex area due to the number of jurisdictions involved, all of which have different rules.

45 of the 50 states charge sales tax, up until recently this was on products only. Some states have started adding in services as the size of the service sector grows, again this differs by state.

(This is different from something other countries have called a Value Added Tax (VAT) or Goods & Services Tax (GST) which is charged on both products & services, is normally a flat rate, it’s not variable by product, and it’s charged regardless of whether you’re selling to a wholesaler or to an end user.)

As a business owner, collecting tax on behalf of the government (any government) is a fact of business life. As an e-commerce merchant, you want to automate as much as possible within your sales systems. However, given the complexity of the rules, how do you make sure you’re not paying too much?

To start with, these four questions are the main ones you need to be able to answer, in this order.

A. What state are you in
B. What states do you sell to other than your home state
C. Do you sell a product or a service (or a mixture of both)
D. Are you selling to a wholesaler or end user

We’ll use an example here, where you’re a seller of designer flip flops in California, in an area with a sales tax rate of 7.5%. 
 

A. What state are you in? 

In California, the sales tax rate is 7.5% (including 1.25% for mandatory local taxes). If you’re in Union City (part of Alameda County) this goes up to 10% with the local tax rate.

By way of comparison, Oregon is one of the 5 states, for example, with no sales tax. Alaska has no state sales tax however allows local counties to levy sales tax.

So any products sold and shipped from a business based in California will attract a 7.5% rate.

B. What states do you sell to other than your home state

To protect small businesses from the complexity of multi-state taxation, the federal government provides limitations on how states can tax the sale of goods across state lines. The Supreme Court has established that states cannot require out-of-state sellers to collect taxes from their customers unless they have a nexus within that state.

Literally translated as a “connection,” a nexus means that your business meets one or more of the following criteria:

  • Your business has a physical location in that state
  • Some of your employees reside and work in that state
  • Your business has property (this includes intangible property, like trademarks, copyrights and patents) in that state
  • Your employees regularly seek or perform business in that state (for example, if you have an active salesperson in that state) 

This means that most online sellers can ship goods out of state without having to charge or collect sales tax. Keep in mind, however, that if you have some sort of physical presence in a state, you may be responsible for collecting sales tax from customers from there.

 

In our example, you have an office in California but not anywhere else. However, let’s say Macy’s decided they wanted to stock your product and you need to hire an account manager in Ohio to manage that relationship.

On this question, the answer is probably yes you do need to include sales tax for Ohio. However, this would be overridden by the 4th question, in that Macy’s would be a wholesaler in this case.

A better example would be if you decided to open a physical store in New York. At that point you’d need to consider sales tax for New York State (& local).

C. Do you sell a product or service (or mixture of both)

For our example, you sell designer flip-flops. That’s pretty clearly a product.

However, there are many examples where the lines are blurred. For an equipment installation, if the customer is buying the equipment and the installation is part of the purchase, the service in some cases is subject to sales tax. However, if you need to get your air conditioner repaired, and that means replacing a couple of small components, then the product is incidental to the service being purchased and hence it’s the service that’s assessed.

This is a good one to get advice on. These categories are never clear cut, a good accountant who knows your industry will be able to give you industry guidance here which is always your best bet.

D. Are you selling to a wholesaler or end user

Let’s say you get a contract where your flip-flops will become part of a set “outfit” (they’ve been noticed by a celebrity in Hollywood). If the company you’ve contracted with will then onsell your product as part of a total outfit, then in that case you wouldn’t charge sales tax, as they will do so in full once they sell the full outfit to the end purchaser.

As you can see, this is a highly complex issue. What’s the best thing to do?

  • Make sure you know the answer to these 4 questions and get advice from your accountant if you need to pay sales tax, and how much.
  • Setup your inventory items in your shopping cart system with enough detail so the automatic calculations can work effectively, based on both the product code, the bill-to address of your customer & your customer type (wholesale vs end user). If your accountant can’t help you with the right systems choices, it might be time to find a new accountant…….
  • Your shopping cart may round up on every order, which will protect you on audits however may mean you’re paying too much, especially if you have a large number of smaller sales. OneSaas will take your sales from your shopping cart and fix this in your accounting system so you’re not paying too much due to “rounding up”.

 

Rachel WhiteComment