Let’s start with the basics. What is sales tax? Sales tax is a consumption tax, which means the consumers are responsible for paying it and only if the sales are taxable retail sales.
If your business sells online, you need to know about sales tax. There is a lot going on in the accounting and tax world around online sales and it can get very confusing and complicated. But do not worry, we are always here to untangle any questions you might have about this subject, or even share with you some new information. So, let’s get to it shall we?
It is important to remember that Sales tax is governed at the state level, there is no “national” sales tax law in the U.S. Therefore, there is not just one answer when it comes to sales tax matters in E-commerce businesses. All answers will depend in the state, city and county laws. Subsequently, the sales tax you as an E-Commerce business need to charge, collect and remit to each state will depend on the jurisdiction you are delivering your product to.
45 U.S. states and Washington D.C. all have a sales tax. But that does not mean that your business needs to be registered, and charge sales tax for all of those states. You will need to explore a little bit more in order to know if there is actually a need for the business to start collecting sales tax within each state.
It is important to understand that online sales need to be reported. But the big question is where to report those sales, if those are ONLINE? For such a simple question the answer can vary depending on the situation. here is what needs to be analyzed:
Joseph purchases three pairs of shoes online from Zars.com (which is an Ecommerce business incorporated in FL). Joseph uses a NJ address, which makes the sale a NJ sale, even though the business is a FL corporation.
Does Zars.com need to file sales tax within the state of NJ or FL? This is where item two Nexus comes into the picture. Nexus is the term that explains the connection of the business to a state. A business will always have Nexus to its home state, but for any other state, some questions will need to be answered in order to determine if the nexus is there.
Which business activities create a sales tax nexus with other states? Here are some common examples:
Using the same example: Zars.com does not keep any inventory in NJ, neither has any employee within NJ. So, there is no physical presence. If Zars.com had inventory, an office or an employee working from the state of NJ then the business would be considered to be operating in NJ and therefore, those sales would need to be reported to this state, and collect and remit sales tax would be needed if applicable.
There is also the transaction volume threshold that e-commerce businesses need to consider. For example, if a business has more than 200 retail sales being delivered to a particular state that might mean than the business then has to registered within that specific state to collect and remit sales tax. Additionally, there is the economic nexus threshold varies with each state. So, for example if the business has more than $500,000 of sales delivered into the state of NY (even if it is not incorporated within NY state) the business has to be registered to collect and remit those sales tax to NY.
So, if Zars.com met either of the transaction volume threshold or the economic nexus threshold, then the business needs to register within the state of NY.Lastly, you need to know if the goods your business is selling are taxable or nontaxable within each state of those where the sales tax Nexus has been met. And that is just another world of its on. Let’s continue using the same example where Joseph purchased three pairs of shoes online from Zars.com but now Zars.com has met the economic nexus threshold with all states in U.S. and therefore the company is obligated to collect and remit sales taxes for all states within the country.
Scenario A – Joseph uses a delivery address with the state of NY.
The first thing we know now is that there is a sales tax obligation within NY state now
Second thing to analyze is if shoes are taxable in NY? Well Clothing and footwear under $110 are exempt from New York City and NY State Sales Tax, but in this example each pair of shoes was $125, which means this sale is taxable in the state of NY, and depending on the city where the delivery is set up to, there might be a local sales tax rate to add in top of the state.
Scenario B - Joseph uses a delivery address with the state of NJ.
Same as the prior scenario, but now the sales tax obligation is linked to the state of NJ instead of NY.
Second question that comes to mind is, are shoes taxable items for sales tax purposes in NJ?
Well in the state of NJ – shoes (including safety shoes, sneakers and tennis shoes) fit into the category of Exempt Clothing and Footwear (only if they are not made of fur).
As you can see, the sales tax world for E-Commerce requires expertise and at Interactive Accountants we are happy to provide you with all its needed to make sure your business in in compliance with all sales tax matters within the U.S.
If you are an E-commerce business and have any questions on Nexus, schedule a call with Matthew Shiebler, CPA here https://calendly.com/mshiebler/30min or with Genessis Romero, EA here: https://calendly.com/genessis to discuss your sales tax matters.
Interactive Accountants, LLC works with many different E-commerce companies and specializes in the specific tax matters surrounding E-commerce. Check out more here: https://interactiveaccountants.com/industries/accounting-for-e-commerce/