Ecommerce Sales Tax 101

E-commerce businesses sell products and services via the Internet to customers throughout the United States. If your business has a nexus (or link) in a state where one of your customer’s resides then you may be required to collect and remit sales tax to that state for the sales you generated in that state.

In general, sales tax is the tax collected by the end user of a product or service. Each state has their own rules regarding what is considered a taxable product or service and what is not. Your products or services may be taxable in one state, but not in anther. In some states if you separately state items on your invoice they are not taxable, if you lump them together, they become subject to sales tax.

In addition, each state has a different definition of “nexus”. Nexus is the term used to determine if you have a “link” in that state. If you are determined to have a link or nexus to a state then you are subject to that states sales and use tax rules and must collect and remit sales tax to the state. To make it even more complex, the definition of nexus as far as sales tax is concerned is different than the definition of nexus as far as state income or franchise tax is concerned. Thus you may owe sales tax in a state which you do not have to file a state income or franchise tax return.

Examples of items which may create a nexus in certain states include:

  • Having an employee in that state, even if your business is based in another state
  • Having a sales person (contract labor) travel to that state, even if your business is based in another state
  • Doing trade shows in that state or otherwise being in that state generating sales
  • Substantial advertising in a state
  • Having a warehouse in that state

The best way to determine if you have “nexus” in a state is to read all the state rules, for each state that you are doing business in and please keep in mind, these rules are constantly changing. The next best thing is to hire someone to handle this for you.

And to add one more fly to the ointment, prior to the Internet when states began to lose sales tax revenue because consumers were buying goods in other states, not paying sales tax, and then returning to their home state to use the products they quickly enacted “use” tax to their definition of sales tax. Use tax is the portion of the sales tax which is attributed to using the product in the state you live in. Thus, if you live in a state that charges sales tax and you purchased a product from another state without being charged sales tax, you owe use tax to your state. This applies to products you purchased over the Internet as well.

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