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Navigating Internet Sales Tax After Transitioning To Ecommerce

Growth and Operations

Navigating Internet Sales Tax After Transitioning To Ecommerce

Updated: July 12th, 2020

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It’s a different world since COVID-19 came on the scene. If there’s one bit of change that the pandemic has accelerated in the small business community, it’s the shift to e-commerce. And while states are beginning to ease their lockdown measures, social distancing seems to stay here. The existing safety measures further validate the need to transition to online stores, even if that means keeping physical locations. 

No doubt that the e-commerce landscape has had some surprises for business owners. Whether it’s adapting to a new type of software or juggling increased demand from customers, there are new business challenges to confront. Chief among the changes, no doubt, is how to handle online sales tax. While entrepreneurs may have a grip on the tax dynamic for in-store sales, navigating internet business tax laws can be a whole different ball game. Let’s break it down. 

Internet sales tax is a whole new world

As a business owner, you probably know that sales tax laws can be a tricky nut to crack, even for brick-and-mortar locations. Unfortunately, it doesn’t get any easier for e-commerce. If anything, things are murkier in the online realm as rule changes and a fragmented market keep business owners guessing, and states and local municipalities send conflicting messages. We’ll wade through some of the muck and the mire of internet business tax laws to get some clarity. 

A 2018 Supreme Court decision known as the Wayfair ruling involving the state of South Dakota changed everything in terms of sales tax on internet sales. Before this decision, the tax obligation of online companies was limited in scope for transactions that were completed remotely, or in states where the business didn’t have a physical presence. In other words, the law was more generous toward business owners back then.   

Those days are gone, however. Now, internet sales tax has become a cross-border affair, as states can command “remote retailers” to pay the piper. This is due to changes in what’s known as a sales tax nexus. Now, this heaps the requirement of collecting and paying sales tax on businesses when there is some connection, including but not limited to a physical one. So, this leaves room for interpretation and has led to disagreements. The glaring exception to this internet sales tax in states in which there is no sales tax requirement. These include Alaska, Delaware, Montana, New Hampshire, and Oregon, though the situation is fluid and could change

How to handle the new internet business tax laws 

Now that you have the background, it’s time to explore what to do with that information when navigating sales tax on online sales after transitioning to e-commerce. You can start by assessing the states in which you’ll be required to charge and pay sales tax, which could be easier said than done. Internet sales tax differs between states because each uses different criteria to determine whether your business qualifies for the sales tax requirement. 

If you fall into one or more of these buckets, you should plan to do some digging into that state’s internet sales tax requirements:  

  • Physical nexus — If you operate a physical location in a state, whether it’s a storefront, office, or a warehouse, you’ve got a physical connection there, and chances are you’ll be on the hook for charging and paying internet sales tax.  
  • Economic nexus — If your e-commerce transaction or sales numbers reach a certain threshold, which will vary by state, you will qualify for this connection. For instance, in New York, the sales and transaction thresholds are $500,000 and 100, respectively. Arizona, meanwhile, lowers its sales threshold each year between 2019 and 2021.  
  • Marketplace nexus — If you happen to operate an online marketplace, you will be classified as a retailer responsible for sales taxes. The criteria for meeting this nexus include providing e-commerce infrastructure, customer service, payment processing, and marketing services.  
  • Click-through nexus — If your business does any online advertising, you’ll especially want to pay attention to this. A click-through connection is established if you generate a sale through a link or website that draws a customer to an out-of-state e-commerce business. 

Step by step: Abiding by internet sales tax in your state 

There are some more steps for you to take in order to make sure you’re abiding by sales tax laws. For example, you’ll most likely need to register your business in the states where you transact. This step’s timing will vary by state but will often be tied to reaching the economic nexus level, sometimes sooner. 

To that end, you’ll also be responsible for filing returns in each state you have a connection. For business owners whose time is already tight, this could seem like a daunting task – not to mention it’s pricey. But, you’ll find there are service providers that will automate the process for you. Keep in mind, too, that there are business loans available, including those offered by Funding Circle, that could help you with the transition to e-commerce. 

As for adding in the tax amount to transactions, you may want to streamline your ordering process so that the system supports internet sales tax calculations. Whether you prefer to do the math manually or integrate an automated solution, like Taxjar, is up to you.   

Integrating business sales tax laws into your online platform

In fact, you’re encouraged to turn to an automated service provider for the following reasons: 

  • Most will calculate the internet sales tax in real-time, so neither you nor your customers need to wait. 
  • The automated nature of the process means the margin for error is small. 
  • Technology can determine what internet business tax laws the transaction falls under for you, so you don’t need to check on a state-by-state basis.  

Develop your internet sales tax strategy sooner rather than later

So what does all of this mean for your e-commerce business? Basically, you’ll want to develop a tax strategy now that you have joined the ranks of online retailers, whether you are selling a product or a service. The good news is that states have been lenient with tax-filing requirements and enforcing their sales tax laws throughout the COVID-19 pandemic. So, that should work in your favor for now. But don’t wait too long. The cost of not complying with internet business tax laws could be higher than any government could heap on you. 

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