How to Calculate Sales Tax for eCommerce?
Many people understand the concept of sales tax but in regards to offline stores. But if you are running an online business like our Shopify development agency, it is paramount that you get your sales tax right.
Sales tax differs from state to state and so it can be a real hassle if you are not familiar with the basic requirements. Continue reading this article to understand how to calculate sales tax for your eCommerce business.
What Entails a Sales Tax?
Sales tax is administered by states and this means that each state has its own regulations – within the guidelines of the U.S. Constitution – on how they impose sales tax. States and localities use this money to develop schools, roads, education programs, and public safety. To pay sales tax, eCommerce businesses charge a percentage of the retail sales to their customers. In most states, sales tax is between 4-8%, which the business owners collect and then submit to their local tax authority through a sales tax return.
Within USA …
The U.S. does not have any federal laws that govern sales tax. All the forty-six states have their unique sales tax. This means there are some differences in the way sales tax is imposed in each state… sales tax may vary depending on:
- The products that are taxable
- The percentage of the tax
- Regulations on when and how online businesses can file their sales tax
- Due dates of the sales tax
However, some states like Montana, Delaware, and New Hampshire do not have sales tax. Knowing your state’s stand on sales taxes can allow you to effectively comply and avoid penalties.
Steps to Ensure Sales Tax Compliance
For eCommerce businesses, you have to fulfill certain conditions to collect and calculate sales tax. These requirements are:
- Have a sales tax nexus
– A nexus means that your online business should have noteworthy ties or
presence in a state. When you have the following business activities, your
online business can create a nexus:
- Location – this includes things such as an office, store, or other physical presence.
- Personnel – one or more individuals such as employee, contractor, or installer.
- Inventory – when you store inventory, most states consider it nexus.
- Affiliates – other businesses attached to your online business.
- Having a trade show- selling items on a trade show even if temporarily.
- Verify if the products are subject to sales tax – While almost all “tangible” products are taxable, there some products considered ‘basic’ and so they are not subject to sales tax. For example, most states do not tax food items.
- Registration of a permit – Once you determine that your business is subject to nexus, register a sales tax permit with your state tax authority. This allows you to collect sales tax from customers. It takes only 1-10 days to get your permit.
Collecting Sales tax from Customers
For you to collect sales tax, the first thing is to set up a sales tax collection for all your eCommerce shopping cart(s). Since the permit for the online business is available, ensure that each online shopping cart is setup with the sales tax collection. It is a regulation that you collect the sales tax from all channels where you acquire your revenue. At Shopify development agency, we comply with these regulations because it is essential to do an online business that is credible.
There are two considerations that are essential when collecting sales tax. If your online business involves shipping products to other states or countries, the state may consider such products subject to sales tax. The other consideration is the origin and destination of the products. In some states, sales tax only applies to your location of business while other times it may apply to the destination of the products.
Filing and Paying Sales Tax
Don’t wait for the date of filing your sales tax to pass by and risk getting penalties. Filing sales tax can get tricky if you don’t have the required information.
This is because most states require that you report the sales tax collected from customers within your state and the exact location where they received their product. For example, the filing has to include customer information such as city, locality, county, and even district.
For you to effectively achieve this, you need sales tax software. Shopify development agency offers such software at discounted prices to serve your business needs. Shopify has eCommerce experts who provide guidance and particulars for your unique business needs. The company will show you how to run an eCommerce website in a profitable way while you are able to calculate sales tax effectively. Filing your sales tax can be complicated without solid software.
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