Last updated - July 10, 2020
You already know that many governments impose sales tax while you sell certain products and services. Generally, sellers or store owners collect the tax amount from the end-customer at the time of purchase. Nevertheless, store owners act only as a link here; they just collect the predefined tax from the customer and pay it to the government.
Sales tax across the world
A lot of countries around the globe have a sales tax or similar taxes at different levels of the government such as state, county, or city. Many countries in Europe have high value-added taxes. Canada too has a combined national-level GST (Goods and Services Tax), along with a PST (Provincial Sales Tax).
In the United States, there is no nation-wide sales tax. However, the majority of state administrations in the US impose a sales tax for goods and services sold under their jurisdiction. It should be noted that every state in the US has a different set of rules and regulations when it comes to sales tax. For example, some states may impose a sales tax on the shipping charges and some do not. Understanding the complicated features of tax might be a tough task, particularly when you have only just set up an online store. But it is totally worth the effort to avoid any hassles later on.
Sales tax for eCommerce
When you have a physical store, things are slightly easier. You can collect the tax based on the store’s location. But things get complicated when you sell products to customers from different states. WooCommerce provides convenient tax settings to make the process as simple as possible. You can go through this simple guide to understand the basic tax settings in WooCommerce.
In this article, we will look into some of the aspects of sales tax in the US, relevant to eCommerce store owners.
Understanding sales tax nexus
Nexus is a word that repeatedly comes to the fore when you deal with sales tax in the US. In dictionary terms, it means just a link. In sales tax terms, however, it is the link of your business to the sales tax terms of a state. There is quite a variety of scenarios that binds you with a sales tax nexus to a particular state. Some of these are as follows:
Your home state
You have an automatic nexus in the state you’re living in. Due to this, you’re bound to collect sales tax from your customers from that state.
You have employee in a state
If someone employed by you and connected to your eCommerce business is residing in another state, you have a sales tax nexus with that state as well. That means you have to collect sales tax from customers of the state(s) you have employee nexus.
The location where you keep your inventory creates a sales tax nexus. You are bound to collect sales tax from a customer who is from the state where your warehouse is located.
Let’s look into an example scenario to understand this better. You live in Georgia, you have an employee in Florida, and your inventory is in California. In this case, you are bound to collect sales tax from customers of all three states.
In addition to the above-mentioned cases, any third-party affiliations or temporary sales events can also create nexus. Read this article for more information.
Obtaining a permit
This might sound a bit strange, but you have to obtain a license before you begin to collect sales tax. This is a legal requirement, and therefore is mandatory to register for a sales tax permit. However, there are many simple ways to register for the permit like through online or mail. There might even be a fee to obtain this permit; this comprehensive guide is highly recommended to understand the process.
After obtaining the sales tax permit, you can start collecting taxes from your customer. This can get pretty complicated if you have multiple nexuses. You have to carefully understand the rules before you start the process. In some states, you have to collect sales tax based on store location, though in the majority of cases it is based on customer location. To add to your woes, in some cases, on top of the state tax, there might be some taxes specific to county or city levels. You have to clearly set the rules to collect the required amount of tax from each customer, based on location.
Once you have collected sales tax according to the requirements, you need to carefully verify it. The whole process is complicated and there is a high probability to make errors. The last step of the process is filing the tax return. This can be done by logging in to the respective state’s tax portal. You can refer this guide to understand the return filing process and due dates.
Options for tax automation are many
As dealing with taxes is a complicated affair, many store owners prefer to opt for extensions and plugins for tax automation. TaxJar or AvaTax are good options to consider for tax automation on your WooCommerce store. You can also read our article detailing the setting up of TaxJar WooCommerce Extension.