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

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. Most remote sales now require you to collect internet sales tax, regardless of your physical location.

In fact, 71% of business owners say their business already operates online to some degree. They typically interact with or find customers online or through a combination of online and in-person. This trend extends to payment preferences, with 64% typically accepting payments online through a website or payment platform, compared to 44% who accept payments in person.

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.

Let's explore the nuances of online sales tax and how to comply with the latest regulations.

Jump to:

• Understanding sales tax online
• How much is online sales tax?
• When do you need to collect online sales tax?

• How to calculate online sales tax 
• Find peace of mind come tax time
• Internet sales tax FAQ

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. 

How much is online sales tax? 

Sales tax rates vary significantly from state to state. This can make it challenging for online sellers to determine the correct amount of tax to collect on each sale. To further complicate matters, tax laws and regulations are constantly changing.

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 

Here is a breakdown of sales thresholds for when online sales tax is required:

How to calculate Internet sales tax 

Calculating sales tax can be a complex task, especially for online businesses that sell to customers in multiple states. Each state has its own tax laws and rates, and these can change over time. 

To ensure accurate calculations, it's important to follow these steps:

1. Identify the state where the sale is being made and determine the state's sales tax rate, including any local taxes.
2. Determine the total sales price of the item(s) being sold and subtract any nontaxable items or discounts.
3. Multiply the taxable amount by the sales tax rate. 

Here is the formula to calculate your online sales tax:

Taxable Amount * Sales Tax Rate = Sales Tax 

Let's say you sell handmade jewelry online. You have a necklace priced at $50 that you ship to a customer in California. California has a 7.25% sales tax rate. To calculate the sales tax, you multiply the price of the necklace by the sales tax rate:

 $50 * 0.0725 = $3.63

Following these steps and staying informed will help you accurately calculate and collect sales tax, ensuring compliance with state and local regulations.

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.