Benjamin Franklin said “in this world nothing can be said to be certain, except death and taxes”. As a business owner, you relate to this all too well (or you soon will). One of the more time-consuming and confusing tasks your business will run into is juggling the various states’ sales taxes.
Before the advent of the internet, sales tax was easy - you charged sales tax for all sales in your storefront. Now, the internet gives your business the ability to sell across the country and the world. So how do you know when and where to collect sales tax?
I will preface this by saying you should always check with your local and state laws to confirm how your state handles sales tax.
But wherever your business is physically located, you have to collect sales tax.
Headquartered in New York? Collect NY sales tax.
Have a warehouse in Texas? Boom. You collect TX sales tax.
Have an office in New Hampshire? Trick question, old “Live Free or Die” doesn’t collect sales tax. But otherwise, you guessed it, more sales tax.
So generally, if you sell physical (tangible) products, then you will be required to collect sales tax in any state your business has a physical presence. Unless your products or service is tax exempt (again, check your local laws), you will need to apply for a sales tax ID.
So if you make custom T-shirts in New York, then you need to apply for a New York sales tax ID. Then whenever you sell a T-shirt to a customer in New York, you will collect the proper sales tax. But when a customer in Texas buys a T-shirt, you won’t collect sales tax.
But those were the old days.
Today as an online business, you have the ability to reach across state lines are amass sales in areas you don’t have a physical presence in.
That’s great, but then states started to catch on and realized they were missing out on a lot of potential tax revenue.
The result? In 2018 the US Supreme Court ruled in North Dakota v. Wayfair, and now it’s possible for states to charge and collect sales tax on out-of-state merchants making sales into their state.
So with the example of a New York business, before you only needed to collect New York sales tax. But now, all your sales into the other 49 states could be subject to sales tax.
Many states have passed a series of economic threshold laws to create a minimum. The intent was never to go after small businesses, but rather large corporations.
But Kansas didn’t get that memo. Did you know if you make a single sales in Kansas that you need to collect sales tax (which they call Compensating Use tax for out-of-state merchants)?
Florida and Missouri still haven’t passed any economic nexus laws either, and therefore all sales into those states are still exempt. Though they expect to join the other 48 states with appropriate legislature in 2021. You can see a full list of economic nexus thresholds by state here.
How am I supposed to manage all this?
If collecting, filing, and remitting sales tax on several states simultaneously (each with different due dates and filing frequencies) sounds difficult, that’s because it is. But luckily there are tools out there that can simplify the sales tax process for your business.
Your eCommerce platform will have settings for sales tax collection. Enable sales tax collection in your nexus states. Then as your store receives orders from customers in those states, your store will automatically collect the correct amount of state and local sales tax required.
In order to file the tax you collected on time, you’ll have to log into your state filing service. Each state has a department (Department of Taxation, Department of Revenue, Department of Finance, etc) that handles sales tax registration and collection.
Now that you’ve filed your monthly, quarterly, or annual sales tax (the state will tell you how often you need to file), now all you need to do is transfer the sales tax to the state from your business bank account (some states will even let you use credit cards).
Now Automate It
Dealing with state taxes as a small business owner can be time consuming, especially if you’re filing monthly. Luckily there’s a convenient and powerful tool called TaxJar.
TaxJar takes all the guesswork out of sales tax collection. By integrating directly with your Shopify store as an app, it automatically processes your sales and shows you each state you’re collecting tax in, with a filing due date for each state. It also integrates with all other major eCommerce platforms and marketplaces like BigCommerce, Etsy, and Amazon.
TaxJar has a tool that helps you find which states you might have economic nexus in. When I had my first sale in Kansas, TaxJar sent me a notification letting me know that I now have nexus. TaxJar also equipped me with a guide for Kansas sales tax, including how and where to register for a Kansas sales tax ID.
Their extensive blogs and guides on sales tax cover each state and are a treasure trove of knowledge that can empower you with everything you need to know about collecting sales tax in yours.
What’s even better, is that TaxJar will even automate the filing process for you. If you never want to touch or deal with sales tax, TaxJar’s auto file feature will take care of all the state filing.
At $20 a month, using TaxJar has saved me hours of dealing with taxes monthly and kept my business compliant with all the states I have nexus in. I highly recommend it to anyone who values automating business processes, especially one as difficult and strict as sales tax. After all, why worry about audits and trouble with state tax enforcement officers when you can shift the responsibility to TaxJar? That’s what I do.