E-Commerce Sales Tax
The rise of e-commerce has led many online retailers to seek guidance on calculating, documenting, and paying sales and use tax on their online sales. Questions about e-commerce sales tax like, “Do I charge the same sales tax rate for every customer?” or “Am I supposed to charge sales tax relative to where the customer is located?” have grown prevalent in recent years.
Over the last two decades, e-commerce retail has become one of the country’s fastest growing trade sectors, outpacing almost every other trade and manufacturing sector since 1999. In 2017, e-commerce sales accounted for 9% of all retail sales in the U.S. This figure is predicted to reach 12.4% in 2020. With the COVID-19 pandemic, online sales will certainly accelerate beyond these projections.
30,000 Foot View
Put simply, an e-commerce business must charge sales tax when the seller has, what is called, “nexus” in a given state. Retailers must have some form of presence in a given state before that state can require the retailer to collect sales tax from buyers in that state. Nexus can be achieved multiple ways.
First, “physical presence nexus” is fulfilled when a seller uses any office space, distribution center, sales room, warehouse, or storage space within a state to conduct business. Employing any sort of representative, agent, or salesman within the state will also satisfy nexus.
Second, sellers can also qualify for “economic nexus” if they complete a certain number of transactions or reach a certain amount of sales to buyers located in a specific state. For example, in California, if an out of state seller’s annual sales to California buyers exceeds $500,000, the online seller achieves economic nexus in California and must collect sales tax on any sales to California buyers.
The Online Aficionados – Remote Sellers
The next question is to determine exactly how much sales tax to assess each customer on a given transaction. Online sellers should begin by looking at their home state to determining whether they are in an origin-based sales tax state or a destination-based sales tax state. There are special guidelines for “remote sellers”, those online retailers who maintain economic or physical nexus in multiple states, where they are required to collect sales tax.
Most states treat in-state sellers and remote sellers differently. For example, an online seller based in Utah with buyers in California, will follow Utah’s origin-based sales tax laws and charge their California customers Utah sales tax on purchases. However, if the Utah seller does business (and has economic nexus) in multiple states, they will be considered a remote seller. In this case, Utah law will have the remote seller apply destination-based sales tax (that is, charge California sales tax on purchases by California residents).
The Rate And Its Components
Next, it is important to understand how the appropriate sales tax rate should be calculated. The total sales tax rate assessed on a given purchase is a combination of several rates. The total rate should combine the state, county, city, and/or district sales tax rates. In origin-based states, these rates are determined by the location of the seller. In destination-based states, the component rates are determined by the location of the buyer.
The Standout – California
When it comes to assessing e-commerce sales tax, California stands apart. California’s unique online sales tax scheme is aptly described as the “modified” origin-based sales tax. Remote sellers located in California must charge a cumulative rate which combines their local state, county, and city sales tax rates with the district sales tax rate of their customer’s location.
Thus, the appropriate California rate for its remote sellers is a blend of both origin and destination-based tax schemes. Of the rate’s four component parts, three are derived locally, while the last piece is determined by the buyer’s out-of-state district.
Keep in mind, only three states require origin-based sales tax for remote sellers: California, Arizona, and New Mexico. Every other state either requires remote sellers to collect destination-based sales tax or requires no sales tax at all.
Paying Uncle Sam
Online sellers exceeding a given state’s remote seller threshold sales figure must register with that state, collect the appropriate taxes, submit the required sales data by filing a return, then remit the collected sales tax dollars to the appropriate state agency.
For example, out-of-state sellers who exceed the $500,000 gross sales threshold in California are required to register with the California Department of Tax and Fee Administration (“CDTFA”) and apply for a California seller’s permit before collecting state sales and use tax. Remittances are also collected by the CDTFA.
Published by Arin Nahapatian