Understanding Sales Tax for Your Online Business

The coronavirus pandemic has significantly impacted how people shop, driving consumers online at a faster rate than previously projected. According to a survey of 5,000 consumers in North America, 36% of people shop online weekly—up from 28% last year. 

New online stores are launching every day. From brick-and-mortar stores migrating their goods online to e-commerce entrepreneurs launching their first ventures, there’s never been a better time to consider starting an online business.

New business practices also come with new challenges and rules that your company needs to follow. As your online business heads into the peak shopping season—the November and December holidays—review the sales tax laws related to online stores. You may need to change how you collect sales tax based on your state and the size of your operations. Here’s a primer on sales tax for online businesses.

The Implications of South Dakota v. Wayfair

The main court case that business owners need to know about is South Dakota v. Wayfair, which reached the Supreme Court in 2018. In this case, Wayfair challenged a South Dakota law that tried to collect sales tax on its internet sales. 

Historically, the law has stated that a state will only collect e-commerce sales tax if the company has a brick-and-mortar location or employees in that region. As Wayfair lacked employees or a physical presence in the state, the company didn’t believe that it needed to pay sales tax. 

However, the Supreme Court ruled in South Dakota’s favor. It decided that sales still need to be taxed on online purchases as long as there isn’t an unreasonable financial or logistical burden on e-commerce companies. Currently, over 31 states have laws in effect that tax online sales for companies that don’t have a physical presence within their borders. 

How Do You Know Which Taxes You’ll Need to Collect?

The verdict of South Dakota v. Wayfair doesn’t guarantee that you’ll need to collect sales tax from your business. There are variations by industry, company size, and the location of your customers that will guide your sales tax collection. 

Your main considerations are the sales tax thresholds in the state in which you live and the states to which you sell. Most states set a minimum threshold of sales needed to reach a nexus, or a substantial status, to collect sales tax. For most states, this is around $100,000 in sales or 200 transactions. However, some states’ thresholds are much smaller: Oklahoma has a $10,000 threshold, for example, and Kansas doesn’t have one at all. If you reach the nexus threshold in any state, you likely need to pay sales tax on the goods. 

What Happens If You Haven’t Been Collecting Sales Tax?

At the start of the COVID-19 pandemic, several businesses needed to shut down or apply for emergency funds to stay in operation. Because of this crisis, many state governments were lax with tax collection. They delayed payment dates and waived late fees to help businesses. 

However, as companies stopped collecting taxes, their expenses went up. Local governments needed to provide aid to businesses and residents and to spend more on COVID-19 testing sites, sanitization supplies, and public health campaigns. Now, local governments are looking to collect sales tax and hold businesses accountable. 

Along with researching the expectations for sales tax in your state, check for any exceptions or grace periods within your region. You may also want to consult with an accountant or tax lawyer to guide your decision-making. They can better tell you what you owe and how to pay it.  

Establish a Process to Collect Sales Tax Moving Forward

Once you have your back taxes accounted for, it’s time to look to future sales. Check to see if your e-commerce software system has the ability to apply sales tax on purchases and adjust the tax levels by state. You can also look for sales-tax-specific plugins that can handle this for you. 

Sales tax is collected as a percentage of total sales, and most customers expect to pay it on top of the purchase price. It is unlikely that you’ll see a drop in e-commerce transactions just because you start collecting sales tax. 

Learn More About Growing Your E-commerce Business

You can use the pandemic to grow your e-commerce business and start a new chapter within your company’s history. However, you still need to follow state and federal guidelines to stay in operation. Use our resource center to learn more about e-commerce operations, whether you are a solo entrepreneur or planning to grow into a large company. 

At Lendio, we also offer free bookkeeping tools for small business owners—this way, you can better track the states that require you to collect online sales tax. Let us make your accounting process easier so you can focus on winning customers over and growing your sales.

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The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.