Every entrepreneur should be familiar with the term ‘e-commerce sales tax’ while running an e-commerce business. It helps you familiarize yourself with the commercial and legal back end of your business, which is vital for an online business.
Every retailer, online or offline, has to go through the ‘tax journey’, where they have to impose a certain amount of tax on the product. The retailer collects the tax and then remits it to the higher authorities to keep track of their legal aspect. Before learning the entire journey of sales tax, it is important to understand sales tax and how it applies in business. Let’s delve into it.
What is E-commerce Sales Tax?
Sales tax is the type of tax customers pay to retailers. Retailers charge a certain tax percentage on taxable items from customers. The tax is collected from customers across the country and transferred to the state’s legal authorities. Sales tax for e-commerce is almost the same as an offline business, with a few exceptions.
Sales tax is related to the state because it is managed and maintained at the state level. The state administration rules out a specific tax percentage on every taxable item. It becomes the responsibility of the retailer or seller to collect the tax from customers by tucking in that percentage on their product. One point to note is that every state and product imposes a specific (and accurate) tax percentage. Let’s now understand whether you, as a retailer, have to pay the tax or not.
Do You Have to Pay Sales Tax on E-commerce Sales?
Sales taxes are paid as per the rules of the state government. Whether it is an online marketplace or an offline shop, sales taxes are paid by customers on the specific taxable item. Each state has its own set of legitimate rules, regulations, and percentage of (tax) deductions. Retailers follow that norm and charge their customers accordingly.
The retailer collects the tax from the customers and remits it to the state authorities as per the guidelines. However, the two thumb rules of e-commerce sales taxes are–
- Your business tax nexus should coincide with the state of your customer
- The item must be taxable in that particular state.
Let’s clearly understand how to comply with the e-commerce sales tax in your business.
How to Comply with E-commerce Sales Tax Laws for Your Business
Step 1: Determine where you have sales tax nexus
Before understanding the conditions of the tax nexus, it is important to understand the sales tax nexus and the economic nexus. The sales tax nexus is the relationship between the seller and the state. The retailer collects the tax from customers, which is transferred to the state jurisdiction.
In contrast, economic nexus means that the seller should have their brick-and-mortar store in the specific state to roll out the state sales tax on their products.
Different countries have different tax laws for e-commerce. For example, in Malaysia, all the online or registered services must collect and remit a 6% service tax on digitally supplied goods (B2B and B2C).
It can be further divided into origin-sourced sales and destination-sourced sales. The former means the sales are taxed at the seller’s location (within the same state). And the latter means that the item can be taxed outside the location (or state). E-commerce entrepreneurs need to differentiate their businesses between the two. Once they have figured out their way of business, imposing the tax becomes the second important thing.
Therefore, you should check the government’s site for tax information about your state or country. Also, check whether you have the same state tax nexus or not. The item you’re selling must also be taxable to rule out the law.
Step 2: Obtain seller’s permits
After categorizing your business and sales tax nexus, the next step is registering with your respective state’s tax authority to obtain your seller’s permit. It legitimizes sellers to impose a tax on their taxable items. It comes with some charges and expiration dates which can differ from state to state.
Step 3: Collect and remit sales taxes
The next big step is collecting the tax from your customers. You are required to report or file for sales tax returns. It also has some requirements which have to be fulfilled by the seller. The requirement depends on the state where you’re remitting the tax. The reporting frequency depends on sales volume and can also be broken down into monthly or quarterly cycles for SMEs. Late submissions are subjected to penalties.
Step 4: Monitor compliance
Monitoring your compliance is equally as important as other aspects of your business. You should manage and monitor your taxes carefully to avoid any misunderstandings or complications afterwards. If it takes a considerable chunk of your time, then hiring somebody who can manage your e-commerce sales tax is highly recommended.
The automated solution has become a go-to option for entrepreneurs to eliminate the hindrance of manual monitoring. Different platforms are available for business owners who provide automated tax management services along with an online marketplace.
Compliance Mistakes to Avoid
Automated or not, business owners can still make some mistakes in keeping track of their sales. And it is still acceptable until it starts hindering your business. So here are a few common mistakes you should avoid throughout the procedure.
Failing to keep track of different rules for different states
As mentioned above, each state has its own rules and regulations that are imposed on the retailer. This becomes special in the case of e-commerce businesses because retailers get customers from all over the country. It is, therefore, essential to have a prior understanding of the rules about each state where your customers come from. Even if the retailers have their inventory management, 3PL shipping, etc., in other states, they are still subjected to implementation tax according to the state.
Reporting incorrect numbers
There’s almost negligible chance of perfection when the reporting is done manually. And it is, in a way, acceptable to make mistakes because nobody is perfect at reporting every detail manually. The task becomes more cumbersome if you have multiple channels to manage. Therefore, opting for an automated reporting and monitoring system makes the tasks ten times easier.
Not filing because you didn’t collect any tax
There are also chances that you mistakenly did not collect any tax, or maybe you were not aware of the taxability of that item. Whatever the situation, failing to file the report could cause you penalties or some harsh charges depending on the rules and laws of the state. Always collect the legitimate tax and immediately report the tax to the state jurisdiction to avoid legal charges.