How does internet sales tax work

Wayfair , increased the ability of states to require internet sellers to charge sales taxes. So what does that mean for your internet business? A state's ability to tax transactions is based on the concept of tax nexus , meaning that the seller has a presence in the state.

Your company can have a nexus if it is doing business in the state, including:. The Supreme Court has upheld South Dakota's law on internet sales tax, but it doesn't apply to other states.

The Wayfair opinion identified three features in South Dakota's law that " Currently five states - Delaware, Montana, New Hampshire, Alaska, and Oregon - have no state sales taxes , so if you do business in those states, you don't have to worry about this issue. Most states will require only larger retailers to impose internet sales taxes.

What determines a "larger retailer" is set in each state is determined by amounts called thresholds, based on. Some states base their threshold on both sales and transactions. Here's what you need to know about this new ruling, for your business:. Other states will have different thresholds, and state laws are changing as states try to accommodate the new reality. If you have a very small online business, for example, a home-based business , it's likely that you won't be affected.

The Streamlined Sales Tax Governing Board has guidelines for remote sellers, showing the threshold for charging sales tax in each state. This information is updated periodically. If you are a larger online seller, you will have to deal with differing state thresholds in addition to changes in tax rates for states and localities where you do business. If you are a larger seller, you may want to look into sales tax software to help you keep track of everything. The internet sales tax situation will be constantly changing for the next few years as states change their laws.

Sales taxes bring in big revenue for states, but they have to act carefully. If one state charges more sales tax than its neighbors, people start to cross state lines to buy big-ticket items.

If the economy takes a dive and people buy less, states feel the crunch too. And more recently, buyers have started deliberately avoiding state sales taxes by buying on the internet. In addition to states, many localities also charge sales taxes. Today, localities in 38 states charge sales tax and these are added to state sales taxes. A Supreme Court decision the Quill v. Dakota case attempted to address the issue of internet transactions. According to the Tax Foundation , the Quill decision said that business "must have a physical presence in a state in order to require the collection of sales or use tax for purchases made by in-state customers.

The Quill decision really didn't solve the problem, because only those online merchants who had a tax nexus in a state were supposed to charge sales taxes. Subscribe and never miss a post. G2 Community Interested in engaging with the team at G2? TIP : Learn about the best sales tax compliance software in Looking for something specific? This article will cover: Where do you have to charge sales tax for online sales? State nexus thresholds Beginning to collect sales tax Location-based sales tax Sales tax considerations What is internet sales tax?

Where do you have to charge sales tax for online sales? To help you remember these five, here's a fun video: When do I need to collect sales tax? Related: The holidays are a time when the sales tax discussion runs high. Learn all about how to stay sales tax compliant during the Cyber Monday online shopping rush. What creates sales tax nexus? State nexus thresholds The most important thing to know about economic nexus is that there is no one-size-fits-all threshold to trigger it.

Beginning to collect sales tax Now that you know if and where you have nexus, the next step is to register for a sales tax permit. Like with nexus, each state differs somewhat, but the steps are relatively the same when registering to collect sales tax: Gather all of your vital business information, like your employee identification number EIN and any information that identifies your business. Visit the Department of Revenue website for your state. Each state has one. Click the link to register your business.

What if my marketplace collects? Location-based sales tax Two other important variables around collecting sales tax are understanding if your business is located in an origin-based state or a destination-based state.

Tax discounts Several states provide discounts to filers for things like filing on-time state returns. Jennifer Clark. Recommended Articles. Management 5 Foolproof Ways to Increase Enrollment for Online Courses More industries and organizations are tackling the digital space to increase their offerings Never miss a post. Over the years, several bills have been introduced to set codified rules regarding the taxation of goods sold over the Internet.

Those in favor include brick-and-mortar retailers who have seen much of their business undercut by cheaper online pricing. Those against include Ecommerce advocates, who argue that in order to survive, new and emerging businesses need to be free from certain government regulations to grow.

While the first two of these failed to be ratified, the Marketplace Fairness Act of is being reviewed for consideration by the committee before it is introduced to the Senate or the House as of November In , a supreme decision was made in the case of South Dakota v.

Wayfair that has set the current standard for states looking to tax sales made out of state by remote or online sellers.

The Court ruled that it is up to each individual state to decide how they are to implement remote tax sales laws. As of , 43 states and the District of Columbia require remote sales tax collection with some states exempting small businesses below a certain amount of gross revenues.

To be considered by the president for approval, a bill must pass in both the U. Senate and the House. While the Fairness Act would not impose any taxation of Internet sales on the federal level, it would allow individual states to impose base state-wide taxes.

As Americans inch closer to the possibility of certain Internet sales transactions being taxed, business owners, consumers, and retail outlets should consider how they might be affected by a nationwide Internet sales tax. While tax revenue may aid local and federal infrastructure along with sponsored programs, consumers will need to compensate by paying higher prices on goods that may have previously been attractive because they were cheaper than goods found in local stores.

By placing a tax on Internet sales, the government collecting the tax revenue can use it to add to current infrastructure and government-sponsored programs, or it may put the funds toward debt repayment.

By placing a tax on Internet sales nationwide, the government would be likely to reap a hefty source of additional revenue. Most of the revenue would come from the largest online retailing sources, such as Amazon and eBay.

Considerably less revenue would come from small niche and specialty stores. The benefits of the added tax revenue will largely depend on how the government allocates the additional funds.

The increase in overall prices on goods caused by the introduction of the sales tax will encourage additional competition between virtual and brick-and-mortar stores. While a vast majority of transactions are still conducted in stores near where consumers live, these stores have undoubtedly lost customers as a result of e-commerce. Since Internet businesses at times appear to operate out of ambiguous locations, the enforcement of these laws and the identification of nexus, which is the state or principality in which the business identifies itself as associating in geographic terms, may be difficult and time-consuming for regulators.

Large businesses with operations contingent on a level of transparency, as is the case for Walmart, do not suffer from difficulties in establishing nexus. It is also unclear how the government will impose laws on the Internet. Imposing regulations on online retail might be excessively difficult right now, but as the percentage of sales transactions shift toward the virtual and away from the physical, governments will be increasingly aware of the lost tax revenue.

If goods purchased over the Internet are taxed, this will raise the prices of the goods to the consumer.