How does sales tax in ecommerce work?
If you sell products or services online the 2018 supreme court ruling Wayfair Vs. South Dakota may now mean that you’re responsible for collecting sales tax from your customers.
Your business owes sales tax to a state if you have economic nexus in that state. In other words, do you sell enough stuff to customers that live in that state by their standards for them to tax you?
The definition of economic nexus is separate for each state, yikes!
For a state by state breakdown check out this blog post from the folks over at taxjar.
As a general rule of thumb, if your business makes $200,000 or more in revenue selling to customers in a particular state, or you make 200 or more separate transactions in that state, you have to pay that state’s government sales tax.
If you sell and ship a product to someone in your own state, you should owe your own state sales tax. Sometimes you may even owe the county sales tax.
If you meet the economic nexus of a different state and you ship a product there, you owe sales tax.
If a company sells a 12-month subscription to a product they normally owe sales tax to wherever the box was shipped.
Hypothetically if mid subscription the user changed their shipping address, then the sales tax may also change, but that’s only if you bill monthly. A prepaid subscription for a product with payment up front will require all sales tax to be paid upfront.
Recording and collecting this sales tax from your customers is your responsibility as a business if you’re classified as the merchant of record.
You are likely the merchant of record if you’re selling through your own website, or a channel that you own and manage.
The good news is that there are some sales tax integrations that can automatically calculate the sales tax owed by a customer on some of the popular ecommerce platforms like Shopify.
More good news is that when you sell a product on Amazon they are the merchant of record. This means that they are responsible for collecting and remitting sales tax, and as a merchant you don’t have to worry about it.