Online Sales Tax: What Sellers Should Know
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Last Updated: 10/09/2023
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Online sales taxes are a growing concern for businesses. Learn how to stay on top of changing regulations and to minimize the burden for your business.
Online sales tax plays an interesting and complex role in the tax world. To determine which sales are taxable to your customer and collectible by your business, you must understand what the point of origin is. Think of sales taxes as being a reasonable charge for reimbursing the government for a variety of costs it incurs during the sales process. Costs include contracts, sales tax law enforcement, and certain public goods.
What Is Online Sales Tax?
Online sales tax is a form of taxation for goods and services purchased on the internet. When businesses operate in a state that requires them to collect sales tax, they must do so whether the sales are made in physical (brick-and-mortar) or digital (online) locations. Collecting sales tax for online businesses can also be required if the goods are sold to individuals who live in a state with sales tax requirements, even if the business doesn't have a physical presence there. Internet sales tax regulations were introduced in an effort to bring all businesses selling products electronically onto an equal footing with the traditional, physical stores that were already required to pay sales tax.
Do You Need To Collect Sales Tax for Selling Online?
Whether you are selling goods or services online, it's important to consider tax obligations for online sales. Depending on the state or territory where your business is based, you may be liable to collect and remit local or state sales taxes from customers whenever you make a sale. If a customer is located in the same state as your business, then the tax for online sales must be collected and sent to the local agency per local regulations. Additionally, even if you do not have a physical presence in another state, you still may need to collect sales taxes from customers who live there because all states possess different laws concerning when sales tax needs to be collected and paid. To ensure compliance with all relevant authorities, businesses should familiarize themselves with their potential tax obligations before they engage in online sales transactions.
How Much Is Online Sales Tax?
For online businesses, sales tax works differently than it does for brick-and-mortar stores. Generally, the business is expected to collect sales tax online for any state where it has nexus, which can include a physical presence or ties to an affiliate. The rate of tax varies from state to state, though typical sales tax rates range between 5-7% in many states.
Some states may also require other taxes on online purchases, such as use taxes or gross receipts taxes. When operating online, businesses are expected to know which laws apply to customers in any state, and they must follow changing tax regulations at the state and local level to stay compliant with taxation laws.
How Does Online Sales Tax Work?
A Supreme Court ruling in 2018 fundamentally changed the way that online sales tax works. Prior to this 2018 ruling, online businesses only needed to collect sales tax for sales that occurred in states where they had a physical presence. The Supreme Court recognized that this gave out-of-state retailers an unfair advantage and ruled that states could now collect sales tax from businesses that had a significant connection or "nexus" to the state. Typically, a business is considered to have a nexus (and is therefore required to collect online sales tax) when:
- It has a physical location in the state.
- It has employees, affiliates, or independent contractors that live in the state.
- Its sales to residents of the state exceed a certain threshold.
If a nexus is present, the business is responsible for complying with all applicable state and local taxes. This includes making sure to collect the proper amount of tax from the customer at the point of sale, then recording and submitting that tax to the appropriate government authorities.
Online Sales Tax Laws, Rules, and Regulations
The Supreme Court ruling in South Dakota vs. Wayfair, Inc. changed the legal landscape around the laws and regulations that affect sales tax requirements for online retailers. Over the past decade, states have increasingly passed laws that require businesses to collect sales taxes, even if they do not have a physical presence in the state. For companies that choose to operate fully or partially online, the onus falls on the business owner(s) to stay up to date on the current tax laws and how any state or local regulations impact the online business sales tax rules that may apply to the business.
For the business owner, many of these rules center around understanding some key terms:
Point of Origin-Based Tax Laws
In non-technical terms, point of origin means you are responsible for collecting and submitting sales taxes in the state where you physically operate your business. For instance, if you make a sale in Illinois, you need to collect and remit sales taxes on items sold in Illinois. While this tax structure was popular in many states prior to 2012, most states have moved to a tax model that allows them to more fairly benefit from businesses that earn a significant amount of sales revenue from the state.
Destination-Based Tax Laws
Many states, including Washington and Texas, choose to use a destination-based sales tax structure. This requires businesses to collect sales taxes based on the delivery location of their customer, or the destination of the product. Certain wholesale sales are not affected, however. These include vehicle sales, aircraft, boats, mobile homes, services, florists, and towing companies.
The Marketplace Fairness Act of 2013
In today's technology age, many consumers enter brick-and-mortar stores to physically research products. Then, they use their mobile devices to purchase the item online. Usually, companies offer online specials as a sales tool.
A bill titled Marketplace Fairness Act of 2013 attempted to level the playing field between traditional retail stores and online merchants. The bill sought to minimize the burden of collecting and remitting taxes to over 9,000 localities — including local, county, and state taxing authorities. Instead of considering all these localities, the bill imposes taxes only at the merchant-based point of origin. A key argument against the bill is the fact it lacks complete guidance on collecting and submitting appropriate taxes. This legislation has not yet been passed into law and is still ongoing.
Which States Require Sales Tax for Online Purchases?
In the U.S., states have widely different requirements for collecting online sales tax, depending on the type of product or service. While nearly all states have some kind of online sales tax requirements (only 4 states — Delaware, Montana, New Hampshire, and Oregon — do not have any laws governing the collection of sales tax), different states have different definitions of what creates a "nexus" and when a business meets the threshold for when sales tax is required to be collected.
Here is a detailed overview of the sales tax requirements for each state if your company does not have a physical presence within the state, effective as of October 9, 2023.
| State | Sales Tax Laws? | Sales Threshold When Online Sales Tax Is Required |
|---|---|---|
|
Alabama |
Yes | Over $250,000 in sales when performing one or more activities as specified in the Alabama Tax Code, §40-23-68 |
| Alaska | Yes | Over $100,000 in sales or more than 200 transactions in the previous calendar year |
| Arizona | Yes | Over $100,000 in sales during the current or previous calendar year |
| Arkansas | Yes | Over $100,000 in sales or more than 200 transactions in the previous calendar year |
| California | Yes | Over $500,000 in sales during the current or previous calendar year |
| Colorado | Yes | Over $100,000 in sales during the current or previous calendar year |
| Connecticut | Yes | Over $100,000 and over 200 transactions during the preceding year |
| Delaware | No | N/A |
| District of Columbia | Yes | Over $100,000 in sales or more than 200 transactions in the current or preceding year |
| Florida | Yes | Over $100,000 in sales during the previous calendar year |
| Georgia | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Hawaii | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Idaho | Yes | Over $100,000 in sales during the current or previous calendar year |
| Illinois | Yes | Over $100,000 in sales or more than 200 transactions in the previous 12-month period |
| Indiana | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Iowa | Yes | Over $100,000 in sales during the current or previous calendar year |
| Kansas | Yes | Over $100,000 in sales during the current or previous calendar year |
| Kentucky | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Louisiana | Yes | Over $100,000 in sales during the current or previous calendar year |
| Maine | Yes | Over $100,000 in sales during the current or previous calendar year |
| Maryland | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Massachusetts | Yes | Over $100,000 in sales during the current or previous calendar year |
| Michigan | Yes | Over $100,000 in sales or more than 200 transactions in the previous calendar year |
| Minnesota | Yes | Over $100,000 in sales or more than 200 transactions in the previous 12-month period ending on the last day of the most recently completed quarter |
| Mississippi | Yes | Over $250,000 in sales in the previous 12-month period |
| Missouri | Yes | Over $100,000 in sales during the previous 12-month period |
| Montana | No | N/A |
| Nebraska | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Nevada | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| New Hampshire | No | N/A |
| New Jersey | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| New Mexico | Yes | Over $100,000 in sales in the previous calendar year |
| New York | Yes | $500,000 or more in tangible personal property sales and more than 100 separate sales transactions during the four most recent sales tax quarters |
| North Carolina | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| North Dakota | Yes | Over $100,000 in sales during the current or previous calendar year |
| Ohio | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Oklahoma | Yes | Over $100,000 in aggregate sales of tangible personal property during the current or previous calendar year |
| Oregon | No | N/A |
| Pennsylvania | Yes | Over $100,000 in sales during the previous calendar year |
| Rhode Island | Yes | Over $100,000 in sales or more than 200 transactions in the previous calendar year |
| South Carolina | Yes | Over $100,000 in sales during the current or previous calendar year |
| South Dakota | Yes | Over $100,000 in sales during the current or previous calendar year |
| Tennessee | Yes | Over $100,000 in sales during the previous 12-month period |
| Texas | Yes | Over $500,000 in sales during the previous 12-month period |
| Utah | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Vermont | Yes | Over $100,000 in sales or more than 200 transactions in the previous four calendar quarters |
| Virginia | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Washington | Yes | Online sellers making $10,000 or more in sales to Washington consumers OR sellers with over $100,000 in sales to any location during the current or preceding calendar year are required to collect sales and use tax or follow the state's notice and reporting requirements. |
| West Virginia | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
| Wisconsin | Yes | Over $100,000 in sales during the current or previous calendar year |
| Wyoming | Yes | Over $100,000 in sales or more than 200 transactions in the current or previous calendar year |
How To Calculate, Charge, and Collect Sales Tax for Your Online Business
Business owners should be aware of the various state regulations that govern how to charge sales tax for online business. Depending on the transactions that a business engages in, different states may or may not collect online sales taxes.
It's essential for businesses to ensure they are meeting all state regulations related to the collection, charging, filing, and remitting of sales tax. To ensure compliance with all applicable online sales tax laws, business owners should take the following steps when transacting business online:
- Research the specific sales tax filing requirements for each jurisdiction and obtain proper registration to collect sales tax where required.
- Determine the applicable internet sales tax amounts for each state in which a transaction occurs, based on product type.
- For each applicable sale, collect the appropriate tax from customers and keep accurate records of all taxes collected.
- File returns according to applicable deadlines established by each taxing authority and pay any due taxes within the specified timeframe.
If implemented correctly, following these steps can help ensure businesses are compliant with their respective state's online sales tax regulations.
Correctly Collecting Online Sales Tax Is Key
Online sales taxes are a complex issue that all businesses must understand. Laws must equally satisfy tax policy principles, fairness, and simplification. For business owners who are unsure about payroll taxes or other complex business processes that can have negative consequences when done incorrectly, partnering with a trusted vendor can help give you peace of mind with important business related matters.
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