Picture this: Your ecommerce business is thriving, and you’re ready to expand into the massive US market, but a sales tax labyrinth is waiting for you. With over 13,000 tax jurisdictions and one of the world’s largest ecommerce markets, the US tax system presents unique compliance challenges. One misstep with sales tax doesn’t just mean paperwork headaches – it could mean substantial penalties, audits, or even legal consequences that could harm your business.
In this guide, we'll demystify the essentials of US sales tax management and show you how proper management can set the foundation for sustainable growth in one of the world's most valuable markets.
Sales tax management in ecommerce
Successfully expanding into the US market requires a clear understanding of your sales tax obligations. This is because each state makes its own sales tax laws, including at the county and city level. In the sections below, we’ll cover some things you need to know to manage sales tax efficiently.
Sales tax nexus
Companies that do business in the US are required to pay sales tax when they’ve reached nexus. Nexus refers to a connection between two things, such as a state and a business, which creates a sales tax obligation. While there are many different types of nexus, the two most common are physical nexus and economic nexus. Physical nexus occurs when you have a physical presence in a state, such as a warehouse or an employee. Economic nexus occurs when you’ve exceeded a state’s sales tax threshold, which is typically based on a certain transaction or sales revenue number.
In many states, this threshold is $100,000 in gross sales or 200 separate sales transactions in a year. For example, if an ecommerce business sells over $100,000 in retail sales in Colorado, the company must register for a seller’s permit to begin collecting sales tax in that state.
Registering for sales tax
A seller’s permit is an identifier assigned to your company by a state government that allows you to collect sales tax on the items you sell online or in-store. After collecting sales tax, you’ll remit it to the state periodically after filing a sales tax return.
To get a seller’s permit, begin by visiting the state’s Department of Revenue website to find out what steps you need to take. You’ll then want to gather all essential information, which typically includes:
Federal Employer Identification Number (EIN) or a Social Security Number (SSN) for sole proprietorships
Business name
Activity start date for your business or limited liability company (LLC)
Company number for a business representative
Physical and mailing address
You may also need articles of incorporation/articles of organization, an IRS Determination letter, and a corporate income tax return. However, this is not an exhaustive list, and you may have to provide additional information. Once your information is gathered, you’ll fill out your application for a sales tax ID, which can typically be done online.
Automating sales tax collection
There are many nuances and complexities regarding sales tax, such as the fact that you must register before you begin collecting. But each state has different rules on how to register, file, and remit sales tax. That’s where an automated sales tax solution comes into play.
The best managed solutions combine innovative technology with expert service, like Zamp. These solutions ensure your company automatically calculates the correct sales tax rates for each jurisdiction and integrates directly with your platform. It can also generate reports, register you in states where you’ve reached nexus, and file taxes with the appropriate authorities, ensuring you’re always compliant.
Managing different tax rates
Sales tax rates vary by state, city, and county. For example, in Florida, the state sales tax rate is 6%, but Duval County has a sales tax rate of 1.5%. This would bring Jacksonville, Florida's total sales tax rate to 7.5%.
Ecommerce companies have to stay on top of changing sales tax rates to ensure accurate tax collection. As your business grows, this can become more complex as you manage larger inventory across more diverse shipping destinations.
Expanding into the US market
Expanding into the US market can be an exciting step in growing your business. But it can also be challenging to understand different tax rules, especially when every state is different. Some states, like Oregon and Delaware, do not have a statewide sales tax, while others like California and Texas have complex and multi-tiered systems.
Tax exemptions and benefits
Some industries and products may qualify for sales tax exemptions. Most states exempt necessities like groceries, clothing, and textbooks from sales tax, although a few tax them at a low rate.
Knowing what products may qualify for a sales tax exemption can save you money, especially when you’re selling in states with high tax rates.
International sellers entering the US
International sellers looking to break into the US market face additional tax complexities. There are both federal and state tax rules to follow, including sales tax collection. For example, a company based in Germany selling to US customers must still understand nexus and register and collect sales tax where applicable, even though it is operating outside the US.
Challenges in sales tax management
There’s a lot to manage regarding sales tax, and plenty of challenges you may encounter along the way. Here are some of the most common:
Rapidly changing tax laws: Sales tax laws are always changing, not just at the state level but also at the local and county level, too. For example, many states are now charging sales tax on digital goods and services.
Errors in tax calculation: Handling sales tax yourself can result in manual errors. If you accidentally charge the wrong tax rate in your settings, your company could face penalties for undercharging sales tax. Overcharging customers can also lead to problems, mainly with refund requests and damage to the company’s reputation.
Risk of sales tax audits: Ecommerce businesses are more likely to face sales tax audits if they don’t manage their sales tax obligations correctly. Having the tax authorities conduct an audit on your business can be time-consuming and costly, and it can lead to significant penalties if discrepancies are found. For example, a business that failed to collect sales tax in a state for several years may be required to pay back taxes, plus interest and penalties.
Best practices for sales tax management
Navigating the landscape of sales tax management requires vigilance and a commitment to best practices. Here are some essential strategies you can put in place to ensure your sales tax is managed correctly:
Automate processes where possible: Use technology to automate sales tax calculations and sales tax filings, as this reduces errors and saves time.
Stay updated: Keep on top of legislative changes and updates in tax laws where you have nexus. Changes can happen frequently, and staying informed is key to managing your sales tax obligations.
Document everything: Maintain accurate records of all sales, taxes collected, assessments, exemptions, and remittances. Having thorough documentation is essential for audits and analyzing your tax strategy’s effectiveness.
Consult experts: Leverage the knowledge of US sales tax experts and advisors to gain insights into emerging trends and best practices. Their expertise can help you anticipate changes and adjust your strategy accordingly.
Wrapping up
Shopware’s open-source platform is the leading edge of ecommerce. They help merchants power up their platforms in all stages of growth and the right tools are crucial as your business expands. That’s why Shopware partnered up with us: Zamp, a sales tax managed solution for ecommerce businesses.
We provide a full sales tax compliance service that handles nexus tracking, registrations, roof-top accurate sales tax calculations, product taxability research, mapping, reporting, filing, and notice management.
Ready to learn more? Speak with our sales tax experts today.
About the author:
Emily Kordys is a Content Marketing Manager with seven years of experience in the sales tax, auto, and real estate industries. She currently resides in North Carolina with her boyfriend and dogs.
