Navigating Online Sales Tax
*** Note that this post only discusses online sales tax for transactions in the United States ***
While setting up your e-commerce store dealing with sales tax may seem incredibly daunting. Most likely you’ll run into questions like: “How much do I charge for tax?”, and “Where do I send the money collected?”
This post will help you navigate the ins and outs of e-commerce sales tax, and hopefully provide you with the information to move forward with your online store.
Let’s dive in.
Will I Have to Charge E-commerce Sales Tax?
It’s complicated, but most likely the answer is probably. Whether you have to pay depends on details like the state you live in, the size of your business, and whether your state has local sales tax. We’ll provide all the details below.
Is There a Federal E-commerce Sales Tax?
This one is easy - NO! The federal government doesn’t collect sales tax!!! You will NEVER have to worry about or pay sales tax to the Federal government when operating your e-commerce site.
What About at the State Level?
This unfortunately is more complicated. Each state has the authority to regulate e-commerce however it chooses, and if you haven’t figured it out yet, this means 50+ different sets of rules. The good news is that unless you have unusual exceptions, you probably only have to worry about the rules in your own state (and possibly Kansas, see below).
For Which Sales Do I Need to Collect Tax?
Put simply, as long as you’re not a large business and don’t have complicated arrangements, you most likely won’t be paying tax to any state but your home state (and possibly Kansas).
You need to collect sales tax if the buyer is located in a state in which has a sales tax and in which you have sales tax nexus. There are 3 states with no sales tax at all, and you will never need to worry about collecting sales taxes from these states (Delaware, New Hampshire, and Oregon). Montana and Alaska have no state sales tax but DO have local sales tax, so if you have sales tax nexus in one of these two states you may still be responsible for collecting these local taxes.
If you have sales tax nexus with a particular state, it essentially means that you have an established economic connection with that state. This means that you will have to register your business with that state and collect and remit sales taxes in that state as well.
In transactions where the buyer and seller are in different states and the seller has sales tax nexus with the buyer’s state, sales tax is always paid only to the state of the buyer. For example, if a California-based seller sells an item to a buyer in Florida, the seller may be responsible for paying online sales tax to the state of Florida. However, the seller won’t owe anything to the state of California.
Most likely you will have to pay state sales tax for in-state transactions, and more details on that are provided further down in the post.
How Do I Know if I Have Tax Nexus With a Particular State?
Each state has its own rules. At the time this blogpost was written, except for special exceptions described below, as long as your business doesn’t sell over $100,000 nor complete greater than 200 transactions to buyers in a given state, you will not have sales tax nexus in that state. In fact, many states require much higher thresholds to have sales tax nexus. If you think you might exceed these thresholds for a particular state, you can look up the actual thresholds for each state by clicking here:
What Are The Exceptions?
For whatever reason Kansas is an anomaly, at least at the time this blogpost was written. In Kansas, any transaction of any value is enough to establish an economic nexus. So any sale to the state of Kansas will result in the creation of an economic nexus. Annoying huh?
In addition, if you have a business “presence” within another state, that usually creates sales tax nexus. Each state is different, but below are examples of the types of things that may create sales tax nexus.
Source: BIGCOMMERCE
So How Much Tax Do I Collect?
As mentioned before, for most people all the tax you collect will be in your own state (and possibly Kansas). However, if you have sales tax nexus in another state besides your own the laws are complicated and exceed the scope of this article. If this applies to you, Avalara and TaxJar are both great resources, and you likely will want to consider using tax software or hiring an accountant.
How Much Sales Tax Do I Collect On Sales In My Home State?
First, determine if your product or service is taxable. Again, each state has its own rules. For example, in California most goods are taxable but services are not. Thus, a California-based consulting business wouldn’t have to remit any taxes even for an in-state transaction because consulting is a service.
Also, even if an item is taxable, it may be taxed at a non-standard rate. For example, in Illinois, grocery items are taxed at 1% rather than the normal state rate of 6.25%. Keep in mind that it is your responsibility to know the tax rates for the items you are selling.
Finally, oftentimes you have to collect local sales tax.
What About Local Sales Taxes?
12 states don’t collect local sales tax, so if you live in one of those states you’re lucky! Unfortunately for the remaining 38 states local sales tax can get somewhat complicated as well.
To figure out how much sales tax you need to collect the first step is to determine whether your state is “origin-based” or “destination-based”.
*** Note *** California is a hybrid state, so what is listed below doesn’t apply. For more information on California, click here.
Origin-based states require the seller to collect based on the local sales tax rate of the seller’s location. In origin-based states the location of the buyer isn’t relevant when determining the tax rate.
Destination-based states are the exact opposite. They require the seller to collect based on the local sales tax rate of the buyer’s location. In destination-based states the location of the seller isn’t relevant when determining the sales tax rate.
Source: TaxJar
If you want to calculate the sales tax rate for your location or someone else’s location, check out the free online calculator provided by Avalara’s online calculator.
Also, if you want check out average sales tax rates for all 50 states click here.
Adding Sales Tax to Squarespace
Unfortunately Squarespace doesn’t provide much assistance in determining how much sales taxes to collect or determining whether your business has sales tax nexus with another state. Thus, you’re pretty much on your own when it comes to determining when and how much sales tax to collect.
To collect sales tax on Squarespace, you manually enter in custom sales tax rates on a state by state basis, and can also be further adjusted by Zip Code if necessary. To get to those, from the home page click “Commerce”, then “Taxes”.
If you’re lucky enough to live in an origin-based state and only plan to collect sales tax in your own state, simply enter your local tax rate for sales within your state and you’re done!! Below is an example of a hypothetical business located in Austin, TX. Since Texas is origin-based, all in-state transactions will require the seller to charge the Austin sales tax rate of 8.25% (6.25% to Texas, 1% to Austin, 1% to Austin MTA Transit)
Note that with this set-up Squarespace will NOT charge sales tax for any location outside of Texas.
For destination based states with local sales tax things are unfortunately much more complicated. If this applies to you, the only way to charge sales tax on Squarespace is to manually type in the sales tax rate for every region in your state by using Zip Codes ranges. Determining which tax rates apply in which Zip Codes is research you will have to do on your own, and can end up being quite time consuming. This is another scenario where plugins or software can be valuable.
Additional Resources - These softwares do it for you!!!
If the sales tax process is getting overwhelming, there are a couple great Squarespace plugins that can help you navigate the e-commerce sales tax craziness. Both cost money, but if your circumstances aren’t simple it might be money well spent.
TaxJar
TaxJar (Starting at $17/month) keeps up-to-date and accurate sales tax rates at checkout and helps determine when you have economic nexus with a state.
Fresh Books
For small businesses, FreshBooks (Starting at $15/month) can help your business manage its accounting and prepare for when taxes are due. It’s probably the closest thing you can get to having an accountant without actually hiring one.
