Remaining compliant with tax laws can be tricky for even the most experienced business leaders. It’s common for eCommerce sellers to wind up in unnecessary confusion around sales tax compliance when they don’t need to pay sales tax in the first place.
Many merchants get left in the dark about eCommerce sales tax requirements – including exemptions, collections, and remittance. Those who know a thing or two about their tax positioning find the process intricate and time-consuming. This conundrum has led to a rise in cutting-edge tech solutions supporting busy entrepreneurs and business owners like you to navigate and manage eCommerce sales tax requirements.
In this article, we are going to discuss:
- How sales tax works for marketplace sellers
- Three ways to determine your tax collection and remittance obligations
- What to do if you are eligible for tax-exempt purchases
- How to access efficient and accurate tax exemption services for eCommerce
What is eCommerce Sales Tax?
eCommerce sales tax is a percentage of a product’s price that gets added to the sale at the point of transaction. It is a consumption tax, meaning a consumer pays the taxable amount once they purchase a taxable product or service from a retailer or eCommerce business.
Many eCommerce resellers are positioned between the marketplace and the end-consumer. This means they are exempt from paying sales tax when they buy goods. Instead, they collect and remit the sales tax upon sale to the consumer.
In the United States, 46 states impose sales tax on products and services. Each state is responsible for regulating and enforcing its tax laws, meaning that eCommerce businesses frequently encounter a colorful variety of tax regulations to comply with. In addition, there is no unified sales tax law prevailing across the United States.
In fact, many states make allowances for special tax districts – such as a city or county – that enforce their own sales tax directives. Additionally, marketplace facilitator tax requires platforms such as Amazon and Walmart to collect and remit sales taxes from marketplace sellers meaning your obligations as a seller further diversify. This results in a compilation of complex sales tax liabilities for sellers to understand and adhere to. So let’s break it down.
When Do You Need To Collect And Remit Sales Tax?
If you find that you are responsible for paying sales tax in a state where you sell goods to consumers, you must collect the correct sales tax from your buyers and remit that tax to the state. Without a resale certificate, resellers may need to pay tax on the products they purchase for resale as well – we’ll look deeper into that soon.
A range of factors determines whether you are obligated to charge and remit sales tax, though as a general rule, you must comply if you:
- Have a sales tax nexus in the same state as your buyers
- Sell taxable products in that state
The following three factors can help determine whether your eCommerce business needs to collect and remit sales tax.
Understanding Your Sales Tax Nexus
The term nexus means you have a strong economic connection with the state. If you have a nexus in the state, you must charge consumers sales tax and then remit the tax to the state.
Any eCommerce business will have a sales tax in its home state, though various state laws may prescribe that you have additional nexuses and obligations elsewhere. Here are some common circumstances resulting in a sales tax nexus.
Home State Nexus
The state where your eCommerce company is located is known as your home state nexus. This might include an office, a warehouse, a store, or another business location where you have a physical presence.
If you have any employees, contractors, or sales professionals performing work for your business in a different state, it may mean you have a nexus there.
Usually, you are considered to have nexus in states where you store inventory. This can be the case even when there is no other physical presence or employed personnel in that state.
If you exceed state benchmarks for either sales volume or transaction volume (for example, over $100k in sales or over 200 transactions annually), you are considered to have a nexus.
Other Considerations for eCommerce businesses
eCommerce businesses can form nexuses based on several other considerations. If you have affiliate connections in a different state, temporarily sell products at events like trade shows, or if you have a third party ship products to buyers, you may create a nexus in that state.
How Do Different States Define Sales Tax Nexuses?
The majority of states define a nexus as “conducting business” or “engaged in business.” Since there is no unified law across the United States, each state is free to define a nexus and create local sales tax laws as they deem necessary.
If a state rules that you have a nexus there, you must abide by their local tax regulations. It is advisable to check with state websites or consult with a tax professional to ensure compliance. Failing to pay sales tax can be a costly and disruptive endeavor to recover from. Below is a table that gives a brief overview of different state’s nexus requirements in the U.S.
|State||Tax Rate||Nexus Requirements|
|Alabama||8%||If you have physical presence such as a retail store, warehouse, or inventory, then you have a nexus in the state of Alabama. The .Alabama code 40-23-68 provides more details|
|Alaska||0%||Alaska does not have sales tax, but it gives room for local municipalities to implement sales tax in their jurisdiction.|
|Arizona||5.6%||Arizona charges what it calls Transaction Privilege Tax (TPT) just for doing business in their state. They provide additional info in their Nexus in Arizona guide.|
|Arkansas||6.5%||According to Arkansas' Sales and Use Tax guidelines, all remote (eCommerce) sellers must remit sales tax when they sell tangible personal property, taxable services, or digital products exceeding $100,000. Arkansas is a destination state.|
|California||7.25%||In California, eCommerce sellers are required to collect and remit taxes on tangible goods if the total sales amount to be delivered exceeds $500,000. They provide more details in the California Use Tax Requirements.|
|Colorado||2.9%||Colorado is a destination state and it requires all eCommerce sellers to obtain a sales tax license for sales exceeding $100,000 to the state. More information is provided in Regulation 39- 26-102.3 from the Colorado Department of Revenue|
|Connecticut||6.35%||Being a destination state, Connecticut mandates eCommerce sellers to pay sales tax if they make 200 retail sales into the state or your gross sales amount exceeds $100,000. The Connecticut Department of Revenue Services details these requirements in their Sales and Use Tax guidelines|
|Delaware||0%||Delaware's Division of Revenue does not impose local or state sales and use tax. They, however, charge Gross Receipts Tax, which ranges from .0945% to .7468%, depending on the business activity.|
|Florida||6% + 0.5% - 2% Discretionary Tax||Florida is a destination state, meaning if you sell goods to the state (of up to $100,000 in total) then you are liable to pay both the Florida sales tax and the discretionary sales surtax, which is based on the county where you delivered the taxable goods or service. They give details to their surtax charges here. For more info on Florida sales tax, check out the Florida Department of Revenue|
|Georgia||4%||Georgia is a destination state. Hence, out-of-state eCommerce merchants are required to collect and remit sales tax on goods sold to the state exceeding $250,000. They provide more information in their Department of Revenue Service.|
|Hawaii||4% or 4.5%+ 0.25% - 0.5% surcharge||Hawaii imposes a General Excise Tax on businesses, rather than sales tax on customers. The general eCommerce GET is 4%, however, some counties charge 4.5%. On top of that, some counties collect additional surcharges that range from 0.25% - 0.5%. They provide info about county surcharges here. They also provide details about the General Excise Tax.|
|Idaho||6%||According to Idaho State Tax Commission, retailers (eCommerce sellers) in the state must have a sales permit, collect, and remit sales tax on tangible property and services. If you are an out-of-state retailer and your total sales to Idaho exceeds $100,000, then you are also to have a permit and collect sales tax on these goods.|
|Illinois||6.25%||Illinois is an origin state, so you automatically have sales tax nexus when your eCommerce business operates out of the state. Out-of-state retailers also have a nexus once they make make up tp 200 transactions to the state or more than $100,000 in cumulative gross receipts from sales of tangible property. They provide extensive info about this in their Sales and Use Tax guidelines.|
|Indiana||7%||Indiana is a destination state, which means you have to collect and remit taxes to the state tax commission. You have a sales tax nexus when you process 200 or more separate transactions or you gross $100,000 in sales the previous tax year. If you want additional information about their state nexus requirement, visit the Indiana Department of Revenue.|
|Iowa||6% + 1% optional Local Option Sales Tax||According to Iowa Sales and Use Tax Guide, remote sellers (eCommerce merchants) that exceeds the $100,000 revenue threshold or processes 200 transactions in the state of Iowa must start collecting eCommerce sales tax. In additional to this 6% state tax rate, counties in Iowa can impose up to 1% local tax.|
|Kansas||6.5%||Kansas is a destination state, and it requires all remote sellers to collect and remit eCommerce sales tax once they pass the $100,000 sales threshold to customers in the state. The state upholds this tax law through Kansas statute 79-3702(h)(1).|
|Kentucky||6%||According to Kentucky Department of Revenue, out-of-state eCommerce sellers are required to collect and remit sales tax once they make 200 transactions or over $100,000 in sales to the state.|
|Louisiana||8.45%||Louisiana is a destination state, and it considers all Louisiana considers entities “Engaging in business in a taxing jurisdiction” to have nexus. You are expected to charge a consumer use tax to all customers located in the state. Louisiana Revised Statute 47:302(K) provides more information.|
|Maine||5.5%||According to Maine Revenue Services (MRS) guidelines for remote sellers, eCommerce retailers are required to collect and remit sales tax on tangible personal property, products transferred electronically, or taxable services for delivery into the state.|
|Maryland||6%||According to Maryland Sales and Use Tax guide, all tangible goods purchased on the internet are subject to a tax rate of 6% and 9% for alcoholic beverages.|
|Massachusetts||6.25%||Massachusetts Sales and Tax law requires eCommerce merchants to collect and remit sales tax once they pass the $100,000 sales threshold to Massachusetts customers.|
|Michigan||6% Sales Tax + 6% Use Tax||If you have physical presence or you pass the economic threshold of $100,000 sales to the state of Michigan, then you have nexus in the state according to theMichigan Revenue Bulletin 2018-16. You are therefore requires, as an eCommerce seller, to report and remit both sales and use tax to the state.|
|Minnesota||6.875%||If you make taxable sales into Minnesota through an online marketplace, the marketplace is responsible for responsible for collecting and remitting Minnesota sales tax on your behalf. The state also has what it calls Small Seller Exception which states that retail sellers are not required to pay eCommerce sales tax if they do not exceed 200 transactions or $100,000 worth of sales to the state. More information is made available here.|
|Mississippi||7%||Mississippi charges both sales and use tax on gross proceeds of sales. As an out-of-state remote seller, you attain economic nexus when your sales into the state of Mississippi exceeds $250,000 within a 12-month period. So you are required to remix tax. They provide additional info here.|
|Missouri||4.225%||According to Missouri Department of Revenue, any vendor that sells tangible personal property to Missouri customers should collect and pay sales or use tax.|
|Montana||0%||Montana is one of the five U.S. states that does not charge an eCommerce sales tax.|
|Nebraska||5.5%||Remote sellers in Nebraska are required to pay sales and use tax if they exceed 200 transactions or $100,000 worth of gross sales in a given year to customers in the state. They provide a guidance document that has additional information on their sales and use tax policies.|
|Nevada||4.6%||As a remote/eCommerce seller in Nevada, once you pass the 200 transactions or $100,000 sales threshold to the state, you are required to collect and remit use tax. The Nevada State Department of Taxation provides additional details.|
|New Hampshire||0%||New Hampshire does not charge an eCommerce sales tax.|
|New Jersey||6.625%||According to the New Jersey Division of Taxation, you are required to collect and remit sales tax on sold goods once you hit the $100,000 sales and 200 transactions per year limit.|
|New Mexico||5.125%||New Mexico has Gross Receipts Tax (GRT) rather than sales tax. According to a remote seller lacking a physical presence in New Mexico is now considered to be engaged in business in the state and will incur a GRT obligation if, during the previous calendar year, it had at least $100,000 in total taxable gross receipts from New Mexico consumers.|
|New York||4%||You have a nexus in New York once your cumulative total of gross receipts from sales of tangible personal property delivered into the state exceeds $500,000, and you made more than 100 sales of tangible personal property delivered in the state. New York's Department of Taxation and Finance requires all eCommerce to collect sales tax once this nexus requirement is met. In addition, counties within the state of New York impose local taxes. New York tax rate by jurisdiction is provided here.|
|North Carolina||4.75%||North Carolina Department of Revenue requires all remote sellers, with gross sales in excess of $100,000 or transactions reaching 200 a year, to remit sales and use tax.|
|North Dakota||5%||You have nexus in the state of North Dakota once you hit the standard economic threshold of $100,000 in retail sales into the state or 200 or more transactions in a year. Hence, you are required to remit tax as directed by the North Dakota Office of State Tax Commissioner.|
|Ohio||5.75%||For the state of Ohio, the standard economic threshold of $100,000 in retail sales into the state or 200 or more transactions in a year establishes a nexus. So you are required to pay sales tax. In addition to the flat rate of 5.75%, counties within the state of Ohio also impose their local taxes. They provide a detailed chart about respective county tax rates here.|
|Oklahoma||4.5%||If you sell at least $100,000 worth of taxable merchandise in the state of Oklahoma during the
preceding or current calendar year, you are required to collect the appropriate state use tax
from the customer. In addition to state tax, counties also impose their local taxes. They provide a useful infographic here for more details.
|Oregon||0%||Oregon does not charge an eCommerce sales tax.|
|Pennsylvania||6%||You have nexus in Pennsylvania once you hit the standard economic threshold of $100,000 in retail sales into the state or 200 or more transactions in a year. Hence, you are required to remit tax as outlined in the Pennsylvania Sales and Use Tax Bulletin 2019-01. Note that municipalities in Pennsylvania can add additional tax to the state's 6% rate.|
|Rhode Island||7%||Rhode Island Division of Taxation requires all remote sellers, with gross sales in excess of $100,000 or transactions reaching 200 a year, to remit sales and use tax.|
|South Carolina||6%||As an eCommerce/remote seller in South Carolina, you are required to collect and remit sales tax if you pass the economic nexus threshold of $100,000 sales to customers in the state. Additional details is provided through the state's Department of Revenue.|
|South Dakota||4.5%||According to South Dakota Department of Revenue, eCommerce sellers are required to collect and remit sales tax once they make 200 transactions or over $100,000 in sales to the state.|
|Tennessee||7%||Online marketplace facilitators/platforms are required to collect and remit sales tax to the state of Tennessee on behalf of eCommerce sellers that reach the standard nexus requirement of $100,000 in retail sales into the state or 200 or more transactions in a year. More details is provided here.|
|Texas||6.25%||You have nexus in the state of Texas if your annual gross receipts exceeds $500,000 to customers in the state. Read more about their sales tax requirements here|
|Utah||4.7%||Remote sellers that process over $100,000 in sales and 200 transactions in the state are required to collect and remit sales tax. You will need to register for sales tax license through the Utah's Tax Payer Access Point. Note that some counties in Utah impose local tax in addition to the state-wide tax of 4.7%. Check county rates here|
|Vermont||6%||For Vermont, the standard economic threshold of $100,000 in retail sales into the state or 200 or more transactions in a year establishes a nexus. So you are required to pay sales tax. More information is provided on Vermont's Department of Taxes page.|
|Virginia||5.3%||According to Virginia's Remote Sellers, Marketplace Facilitators, and Economic Nexus guideline, eCommerce sellers are required to collect and remit sales tax once they make 200 transactions or over $100,000 in sales to the state.|
|Washington||6.5%||Washington, like many other states, uses the $100,000 sales to in-state customers as economic threshold to establish a nexus. however, they made a little tweak to their requirement. First, this $100,000 threshold is based on your cumulative/total gross income in a calendar year, rather than the gross receipt condition of other states. Also, the 200 transactions threshold is eliminated. You must also file a Business License Application to be able to collect and remit sales tax. Get more details here|
|Washington D.C.||6%||Washington D.C. follows the standard economic nexus requirement of more than $100,000 in sales and more than 200 transactions into the state. They provide additional information in this guideline.|
|West Virginia||6%||You have nexus in West Virginia if you make more than $100,000 in sales annually in the state or more than 200 transactions in the state in the previous or current calendar year. More information is provided here. note that local municipalities could add their local taxes but it is no more than 1%.|
|Wisconsin||5% + 0.5% County sales tax||Wisconsin's Department of Revenue requires marketplace facilitators/providers to collect sales and use tax on behalf of eCommerce sellers on their platforms. In addition to the state-wide tax rate of 5%, certain counties also impose local taxes. See Wisconsin county rates|
|Wyoming||4%||Like most states, Wyoming's nexus requirements follows the standard $100,000 in retail sales or over 200 transactions a year threshold. You are thereby required to pay sales tax if this requirement applies to you as an eCommerce seller. More information is provided in Wyoming's Enrolled Act No. 41.|
Is Your Product Taxable?
Each state determines which products are taxable and which are not. As a general rule, most tangible personal property such as home decor items or clothing is taxable. On the contrary, it’s common for products such as food items for personal use, certain medical supplies or devices, and goods sold to the federal or state government to be regarded as sales tax-exempt purchases.
Of course, there are exceptions to the rules in each state, so it’s crucial to ensure you’re well-versed in the local sales tax laws. For instance, the state of Pennsylvania does not impose a sales tax on clothing, Illinois charges a sales tax of only 1% on grocery items, and Delaware doesn’t charge a sales tax at all.
Based on the above, you may discover that your eCommerce company is required to collect and remit a reduced sales tax – or no tax at all – on the products you sell. It’s wise to have this confirmed by an accountant or other tax professional before proceeding. So how can marketplace sellers grow their business in confidence that they are in compliance with all sales tax requirements?
eCommerce Tax Collection and Remittance Support For Your Marketplace Storefront
If the idea of tax collection and remittance is giving you a headache, you’re certainly not alone. We’ve compiled a list of cutting-edge tech solutions that help you to collect sales tax on the products you sell, and remit sales tax collected to the state without the hassle.
Tax Jar is a cloud-based platform helping modern marketplace sellers stay tax compliant by automating the sales tax lifecycle across all sales channels. Supporting over 11,000 tax jurisdictions, eCommerce companies can keep their finger on the pulse of economic nexuses, collecting the correct sales tax on individual products, and presenting filings and remittances on time.
Expanding into new markets is seamless with Tax Jar’s AI-driven product organization, real-time calculations, and gross transaction reporting. Flexible API facilitates a range of integrations with platforms including Walmart, Amazon, Etsy, and more. Plus, their award-winning customer support crew is readily available to assist with onboarding and education to get you started on the right foot.
As one of the leading cloud-based solutions supporting eCommerce companies to sort their tax collection and remittance compliance, Avalara’s Avatax keeps accounting smooth and streamlined by calculating tax based on location and product.
With over 700 integrations, Avalara products can be used in conjunction with various apps associated with your eCommerce company. They have several features to help make tax classification and remittance easy.
The interface is intuitive to use, and they have a customer support team on standby to help with questions that sellers have.
Periodically Check Your Sales Tax Requirements
Local state laws are consistently in a state of flux. Systematically check that you comply with sales tax laws and have a valid resale certificate. Failure to comply with various tax law changes (for example, shifting nexus requirements from a transaction volume to a sales volume) can be a costly endeavor, better avoided.
Adaptations to business operations, such as hiring a new employee in a different state, establishing a physical presence in another state, or reaching a certain number of sales, may mean you now have a business nexus in that state. Conversely, closing down operations in a new location or changing suppliers may imply that your nexus no longer exists in that state.
What Is Marketplace Facilitator Tax?
A marketplace facilitator is a platform like Amazon or Walmart that contracts with third-party sellers to facilitate the sale of physical or digital goods and services. Marketplace facilitator tax is an obligation that a state places on marketplace facilitators to collect sales tax on anything sold into that state. These regulations shift the responsibility of calculating, collecting, and remitting sales tax from eCommerce merchants to the marketplace facilitators.
Marketplace facilitator tax laws began emerging in 2017. Today, almost every state has unique tax legislation that defines what a marketplace facilitator is, and the nature of third-party buyer or seller transactions that they tax.
Marketplace platforms must manage sales tax on all items sold by third-party sellers if the items get sold in states where facilitator tax legislation is enacted. In some states, local taxes are not included in MPF laws, and marketplace facilitators are not responsible for those taxes.
How Does Marketplace Facilitator Tax Affect My Tax Obligations?
If you sell into a state with this type of legislation, the marketplace you are contracted with will collect and remit sales tax on your behalf. Some states do not require eCommerce merchants to file taxes in their states since the marketplace has already done it. In other states, you may need to file a zero return. If you sell into a state that does not have these regulations, you must continue to calculate, collect and remit your own sales taxes.
When your eCommerce business sells across multiple platforms including marketplaces like Amazon or eBay and non-marketplace sites like Shopify or Woocommerce, you’ll have a different set of regulations to comply with for each state.
Here is a simple example to illustrate our points; let’s say you sell items through Amazon’s marketplace to five states – three of which have a facilitator tax statute on the books in their states, and two of which do not. Amazon must calculate, collect, and remit the state taxes on goods sold into the three states. In the other two states, you are responsible for collecting and remitting required sales taxes.
In reality, selling items to multiple states can be much more complex than the above example. It’s advised to speak with a tax expert about Marketplace Facilitator (MPF) laws in your nexuses, and use purpose-built tax compliance solutions to your advantage so your business seamlessly operates in accordance with all sales tax regulations.
At the time of this writing, there are only 5 states which do not have marketplace facilitator laws on the books and they are Alaska, Oregon, Montana, New Hampshire, and Delaware.
Frequently Asked Questions
Will My Sales Tax Obligations Change?
Your sales tax obligations may change over time. Factors such as transaction volume, sales volume, or the location of your sales tax nexus (for instance, due to market expansion or a change in supplier) may adjust your sales tax responsibilities.
Sales tax laws are regulated by each state and are subject to flux. Any number of shifts could result in your business transitioning from sales tax exemption to sales tax liability – or vice-versa. Periodically checking in with a tax professional will ensure your business remains compliant with sales tax regulations.
Which Products And Services Are Exempt From Sales Tax?
Sales tax exemptions exist in every state. Under Federal law, sales made to the federal government and its agencies are tax-exempt. These exemptions exist in most states for sales made to the state or its agencies, or any cities or counties.
Additionally, most states offer sales exemptions for the following products and services:
- Food supplies intended for home consumption
- Prescription medicine and specific medical devices
- Products paid for with food stamps
Navigating the sales tax requirements for an eCommerce merchant operating a business across multiple states can be a handful. Assuring compliance with local governments, fluctuating regulations, and tax laws often requires the luxury of spare time that many entrepreneurs and successful business owners simply do not have.
Luckily there are plenty of tech solutions offering sales tax exemption services for eCommerce businesses. With these services, you can rest assured that your business is tax compliant and your sales tax exemption processes are streamlined and well documented.