Guide to Ecommerce Sales Tax in the U.S.

guide ecommerce sales tax united states taxes

As an e-commerce business, you have a lot to figure out. You need the right host, shipping policies, privacy policies, and more. But one thing you need to get right from day one is e-commerce sales tax.

Unfortunately, there's no one-size-fits-all solution to sales tax. Your relationship with it depends on your state, the size of your business, and the products you sell.

Ready to learn more? Keep reading for our complete guide to e-commerce sales tax.

What is Sales Tax?

Sales tax is a form of taxation used by the majority of states. It's a form a pass-through tax, which means you collect it from customers and then report and deposit the tax to the state.

Essentially, state governments use businesses as the middle-man for sales tax revenue. You must charge the customer tax as part of the sale.

Every state sets its own sales tax laws. Generally, raw materials aren't taxable, or you get a tax refund. However, you must charge tax on finished products unless the state exempts those items from tax. For example, the state of Minnesota doesn't assess sales tax on clothes. So, if you are a Minnesota-based clothing retailer, you don't need to worry about sales tax on those items.

The key takeaway is this: sales tax varies by state, so you need to get to grips with all the states you intend to sell in before you start shipping there.

Are There Any States that Don't Charge Sales Tax?

Yes. Five states opt not to assess sales tax. These are:

  • Alaska
  • Delaware
  • Montana
  • New Hampshire
  • Oregon

Hawaii is also an exception. However, Hawaii uses a different system called the General Excise Tax (GET). The GET is assessed on all business activities in the state. E-commerce from the continental United States typically falls under the "all others" category and assumes a 4% tax rate. What's more, counties can adopt a surcharge. Honolulu, Kauai, and Hawaii counties all have a surcharge of 0.5% until December 31, 2030.

When Do You Need to Charge Sales Tax?

The joy of e-commerce is your ability to live anywhere and operate everywhere - within reason. 

However, the long arm of the internet does make this question confusing: when do you need to start charging sales tax?

Most states require you to have a virtual connection to that state before you start charging e-commerce sales tax. It can look like having an office or distribution center in that state or employing a salesperson in that state.

E-commerce businesses are more likely to see their tax obligations associated with how much business you do in each state. It's called an economic nexus, and these rules require you to start charging and collecting sales tax once you reach a certain limit in sales or conduct a specific number of transactions.

The good news is that this makes e-commerce simple for businesses with a local presence who also want to start an online shop. You might do most of your business in your state and occasionally ship across a state border. If you are based in Colorado and make a handful of sales in Iowa, then you're unlikely to need to collect and pay Iowa sales tax. Iowa requires you to earn $100,000 in sales from its state before its tax registration threshold kicks in.

Using an accounting service that can help you keep track of your revenue and keep you compliant.

What to Do if You Have to Pay E-commerce Sales Tax

So your accountant says you met the sales tax threshold in a handful of states. What happens next?

Your first step is to register for a state sales tax permit via the state's Department of Revenue. Your business can't collect sales tax until you have the permit in hand. If you do, you'll commit tax fraud and be subject to prosecution. You can complete most of your registrations online, but some states do require you to register by mail. You should have your tax permit number immediately, but it may also come by mail within ten business days.

To apply, you'll need to provide:

  • Your personal contact information
  • Your business contact information
  • Social security number or Employer Identification Number
  • Your business entity type 
  • Your NAICS code (454110, if you're strictly e-commerce)

If you have a significant web presence, you can register with multiple states at once with the Streamlined Sales Tax Governing Board. It covers registration for:

  • Arkansas
  • Georgia
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Michigan
  • Minnesota
  • Nebraska
  • Nevada
  • New Jersey
  • North Carolina
  • North Dakota
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Dakota
  • Utah
  • Vermont
  • Washington
  • West Virginia
  • Wisconsin
  • Wyoming

Going this route saves you a considerable amount of time and covers all your bases - at least in 24 states. You also don't need a sales tax license in the five states without taxation.

How Do You Apply Ecommerce Sales Tax to Your Store?

The good news is that once you have all your paperwork complete, charging sales tax is easy. Most e-commerce systems allow you to enable taxes within the platform. Once you turn the feature on, it will count your tax jurisdiction and will collect taxes automatically according to the customer's shipping address. Although some platforms do make it a chore, you can also get an extension to manage sales tax on your behalf.

Once you start collecting sales tax through your platform, you will then receive tax reports. You should review them at least quarterly. You can then pass your reports and details on to your accountant, who will determine whether you are liable for tax and can help you prepare the appropriate reports.

All Ecommerce Stores Have Sales Tax Obligations

The joy of e-commerce is that you can work from anywhere and sell almost anywhere. However, you do have tax obligations unless you live in a state with no sales tax. Thankfully, a combination of a good accountant and the right platform makes commerce sales tax easy to manage.

Do you have more tax and accounting questions? Visit the finance archive for more helpful taxation and accountant content for businesses of all types.

Official Bootstrap Business Blog Newest Posts From Mike Schiemer Partners And News Outlets