Internet sales tax: When do you need to collect online sales tax?

If you purchase an item in a store you likely pay sales tax. The same goes for selling. If you sell goods, you need to collect sales tax. But when it comes to online and e-commerce sales, the rules can be a bit different.

For many years, online retailers did not have to charge and collect sales tax in states where they were not located. That is no longer the case, and most remote sales now require you to collect internet sales tax. Let’s look at whether you need to collect sales tax and how to meet online sales tax requirements:

Understanding sales tax online

As a small business owner, you’ll need to calculate sales tax, collect it, and pay it to the relevant state governments. Sales tax is for any goods, but internet sales tax is specifically for online or remote sales.

If you have a nexus in the state you’re shipping the product to, you should charge sales tax and remit it to the state, regardless of whether the sale is via the Internet or online. However, there are other requirements for when you’ll need to collect internet sales tax. 

When do you need to collect online sales tax?

As a seller, assessing sales tax rules to determine whether you need to collect and pay sales tax is your responsibility. 

Note that there are five states without sales tax:

• Alaska 
• Delaware 
• Montana 
• New Hampshire
• Oregon

But if you have a physical presence, such as a storefront, office, or warehouse, in any other state, you have to collect and pay sales tax.

The general rule is that you will need to collect internet sales tax if you meet one of the following:

• Physical nexus: Your business has a physical presence in the state.
• Economic nexus: Your sales or transactions exceed a certain threshold for a state. 

Note the limits for meeting an economic nexus will vary by state.

You have a physical nexus

A physical nexus is a physical presence in the state. A nexus does not only refer to your business’s physical location—it can also be applicable in the following situations:

• An employee selling your goods in another state
• An affiliate selling goods on your behalf in another state
• Sales at a trade show or other event in another state
• A state in which you store your inventory, even if you have no employees there
• A state in which your drop shipper is located

Wherever your business’s physical presence is, you will have a sales tax nexus. 

You have an economic nexus

If you are a remote seller and meet or exceed the economic nexus threshold for a state, you’ll need to register with the state to collect and remit sales tax.

You can have an economic nexus regardless of physical presence because it applies to both in-person and online sales. To establish an economic nexus, there must be sufficient business activity to warrant taxation, such as: 

• Sales dollar amount 
• Transaction volume 

Note that a physical nexus is generally easier to establish. In general, you can establish the tax obligation if your business operates in a state.

Internet sales tax requirements

To ensure that your online business meets e-commerce sales tax requirements, you’ll need to understand the rules of the states where you operate and sell goods. Here are some tips for meeting internet sales tax requirements: 

1. Determine the states where you have a physical nexus. 
2. Cross-reference with other states for economic nexus requirements. 
3. Get a sales tax license in the states where you have a nexus. 

Finally, it’s your responsibility to charge online sales tax according to the state’s requirements and pay it to each state’s department of revenue by the due dates. Accounting software can automatically calculate sales tax for you.

Find peace of mind come tax time

Whether you’re just starting a business or you’re an established small business owner, sales tax is something you’ll always need to account for if you’re selling goods. 

Keeping track of how much you need to charge for sales tax can be a hassle, and accounting software like QuickBooks can automate the sales tax process and take the burden of collection and calculation off your plate.