How to Collect Sales Tax Online

Three Parts:Assessing Your LiabilityUpdating Your Checkout ProcessFiling Sales Tax Returns

When you have a brick-and-mortar store, sales tax is relatively simple – you just collect the state and local sales tax where your store is located. However, if you have an online store, whether you have to collect sales tax online depends on your location as well as the location of the customer. To collect sales tax online, you must first determine the states in which you are liable for sales tax, then update your checkout process so sales taxes are collected from customers that live in those states.[1][2]

Part 1
Assessing Your Liability

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    Determine your sales tax nexus. As an online merchant, you generally must collect sales tax in any state in which your business has a physical presence, which includes a store, office, or warehouse. This physical presence is known as your "nexus" in legal terms.[3][4][5]
    • The physical presence extends to aspects of your business that don't participate in sales directly, such as administrative offices.
    • If you're unsure whether you qualify as having a physical presence in a state, contact that state's tax or revenue agency to find out for sure.
    • Some states, such as New Hampshire and Oregon, do not have state sales tax. However, even if your business is located in one of these states, you may be responsible for collecting sales tax in other states if you have a physical presence there.
    • For example, if your business is headquartered in Oregon, but you have a regional distribution warehouse in Pennsylvania to distribute products purchased in the eastern part of the country, you may need to collect sales tax from Pennsylvania residents.
    • Sales taxes only apply to customers who also live in that location, or are having the goods shipped there. This means your sales tax liability may differ if you have a customer purchasing something in one state, where you don't have a nexus, but who wants it shipped to a different state in which you do.
    • Your sales tax liability also may differ depending on whether you're collecting sales taxes in your "home state" (the state where you live or where your business's headquarters is located), or collecting sales tax as an out-of-state business that happens to have a nexus in that state.
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    Contact the appropriate tax authority. Once you've determined the states in which you must collect sales tax, you'll need to contact the sales tax department in that state to find out what rates and exemptions apply, and how you can submit returns.[6][7]
    • Sales tax typically is handled by the state department of revenue. You can find out more information about each state's sales tax by visiting that state's department of revenue website.
    • You also may be able to find information about sales tax by visiting a website operated by the department of commerce or similar state government agencies that cater to small businesses.
    • The federal Small Business Association (SBA) has a list of links to state departments of revenue on its website, which you also can use.
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    Submit a permit application. Each state will have its own form you must complete and submit to the appropriate authority to get a sales tax permit. In some states, collecting sales tax is unlawful without the appropriate permit.[8][9]
    • The application requires you to provide information about your business, including its legal name and mailing address, as well as the name and phone number of the contact person responsible for handling your business's sales tax.
    • Typically you have the option of either printing the form to complete and mail, or filling out an application online and submitting it electronically.
    • Your application will be processed faster if you submit it online, since you won't have to wait for the mail.
    • Whichever method you choose, make sure you make at least one copy of your application for your business records before you submit it.
    • Some states may charge a small fee to cover the costs of processing the application, typically around $20.
    • After your application is processed, you will receive your sales tax permit or license in the mail, along with information regarding when and how you must file returns.
    • Keep in mind that different states may have significantly different payment schedules and methods for reporting, so if you're collecting sales tax for several different states, read each state's information carefully.
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    Keep up-to-date on legal requirements. E-commerce is growing, and the law in this area can change rapidly. States may enact their own legislation that affects your tax liability, or the federal government may enact legislation that controls sales tax collection in all 50 states.[10]
    • Most states have so-called "Amazon laws" that require large online retailers to collect sales taxes regardless of whether they have a physical presence in the state.
    • However, if you have under $1 million in annual sales, your business typically is exempt from these requirements.
    • Federal laws that have been considered have had similar exemptions for small businesses selling products and services online.
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    Consider using a shopping-cart service. Many shopping-cart services automatically compute sales tax and collect it where necessary, based on the information you've already supplied regarding the physical locations of your business.[11][12]
    • While this can save you a lot of time and effort, keep in mind that these services still are not a substitute for completing the permit applications in the states where you're required to collect and pay sales tax.
    • If you do use a shopping-cart service, check regularly to make sure you have sales tax permits in all the states in which your service is collecting sales tax from your online customers.
    • Shopping-cart services do typically keep up with the sales tax rates in the states for which you're supposed to be collecting sales tax, so you don't have to keep up with those rates and adjust them manually if they change.

Part 2
Updating Your Checkout Process

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    Find sales tax information in your checkout settings. Each e-commerce host or website builder has its own checkout program and procedures, but generally you should be able to find a tax entry in your account settings.[13][14]
    • If you use multiple online marketplaces, you'll have to add sales tax information in each of the services you use.
    • If you're required to collect sales tax in a state, you should enter the information in your checkout settings even if you've never had a customer from that state before and don't anticipate that you ever will.
    • Keep in mind that some states require you to submit a completed return even if you haven't collected any sales tax during the given reporting period.
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    Enter shipping information. The information you keep in your account settings regarding your business addresses and the locations from which customer goods are shipped helps determine the states for which you must collect sales tax.[15]
    • Anytime you add a new regional distribution center or warehouse, you should update your shipping account information accordingly.
    • Keep in mind that a warehouse or distribution center may count as having a physical presence in that state even if you are only leasing space in a location used by many different online retailers.
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    Add or edit sales tax information. If you don't use a shopping-cart service to automatically calculate tax rates, you must look up this information and input it manually using your website's account settings.[16][17]
    • Don't forget to enter local sales tax for the places where your business headquarters, offices, or warehouses are specifically located.
    • If someone from that city or county happens to purchase something from you, you'll have to collect local taxes as well, just as if they walked into a physical store and purchased those products.
    • Typically you must indicate whether the state is your "home state" for tax purposes. You also may be required to classify the type of sales tax the state has – whether origin-based or destination-based.
    • Keep in mind that you also may be responsible for collecting international sales tax, including Value-Added Tax (VAT) for customers in the European Union. If you ship products overseas, you may want to contact an international commercial attorney to assess your international tax liability.
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    Repeat the process as needed. If you're setting up your website manually to collect sales tax, typically you must provide most of the same types of information for each state or locality from which you want to collect sales tax.[18][19]
    • Double-check the rates for each state or locality to make sure you're entering the correct rate.
    • Keep in mind that at a minimum, you probably will need to collect sales tax for sales in your home states. If you have warehouses or distribution centers in other states, you typically must collect sales tax there as well.
    • If you have remote employees living and working in other states, their presence in another state also may be sufficient to trigger sales tax liability.
    • You may want to create a spreadsheet before you begin entering information so you can make sure you have all the correct rates and that you've added all necessary states or localities for each account, particularly if you sell through several different platforms or marketplaces.
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    Consider subscribing to a tax collection service. Particularly if you sell goods or services through a number of different platforms or marketplaces, you may want to open an account with a tax collection service that will pull all sales tax information into one place.[20][21]
    • Sales tax collection services also save you the hassle of having to create spreadsheets or otherwise compile tax rate information, including researching exemptions and keeping up-to-date on rate changes.
    • Some tax collection services will even create and file your reports for you. Although typically you will need to have first submitted an application for a permit on your own.

Part 3
Filing Sales Tax Returns

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    Total the sales tax you've collected. Keep track of your sales tax due dates on your calendar, and access your accounts on any platforms or channels through which you sell goods or services to find the sales taxes you've collected from customers in each state.[22][23]
    • Keep in mind that some states may require monthly returns, while others expect quarterly or even annual returns. The frequency with which you're required to submit returns may depend on your sales volume.
    • If you haven't subscribed to a sales tax collection service, you'll need to create a spreadsheet to keep track of this information yourself.
    • Check with each state to determine how much information you're required to collect. Some states require you to account for sales tax collected per individual county or tax district within the state.
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    Complete the required returns. Some states require you to fill out a form and mail it with your payment. However, most states allow you to complete your sales tax returns and make your payments online.[24][25]
    • Typically you can access the forms you need to complete your returns on the state department of revenue's website.
    • The state may send you forms in advance of your due date or otherwise notify you that taxes are due, but don't rely on this or wait to file if you don't hear anything.
    • Pay attention to the information required on the tax return. If you're not using a sales tax collections service to manage your sales taxes, you may want to design your own spreadsheet to mirror the information required on the return so you can easily transfer the correct information.
    • Some state forms may require a breakdown of taxes you collected in specific parts of the state.
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    Submit your returns. Many states allow you to easily submit your returns and payments online. Make sure you've marked the appropriate deadlines on your calendar, as they may vary among states. Some states require you to file returns monthly or quarterly, while others only require yearly returns.[26][27]
    • Typically the deadline is the 20th of any given month, but don't assume the dates will be the same if you're submitting sales taxes in multiple states.
    • Keep in mind that in many states you must file a return if you have a permit or license to collect sales tax for that state, regardless of whether you actually collected any during the reporting period.
    • If you didn't collect any sales tax for a given state, check with the state's department of revenue to determine whether you are required to file a "zero return."
    • Make a copy of your return for your own business records before you submit it with payment to the state.

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Categories: Taxes and Fees