As a business owner, it can sometimes feel like we’re just expected to know things by osmosis. But there’s no magic handbook to tell you that you have to obtain a county business license or how your income tax works now that you’re incorporated.
One place e-commerce merchants could really use a guiding hand is sales tax. When do we charge it? Who do we charge? How much do we charge?
On top of that, the e-commerce companies, like Shopify, BigCommerce or WooCommerce, that we use to make online sales are incentivized to make it painless to get an e-commerce store online. They have onboarding down to a science, and now truly allow online retailers to go from a blank slate to their first listed product in mere minutes.
But this creates tension between getting up and running fast on one hand, and thoroughly ensuring that your business is compliant with all pertinent rules and regulations.
And sometimes starting an online store too fast can come back and bite you.
The Problem: It’s Too Easy to Collect Sales Tax
…On Shopify, Big Commerce, WooCommerce and other online shopping carts, that is.
For example, when setting up your Shopify store, the instructions plainly say:
“You need to determine whether you should charge [sales] taxes. If you’re not sure, then consult with local tax authorities or a tax professional. If you determine that you need to charge tax on your products, then register with your region’s tax authority.”
And then you’re given the option to move on and continue to set up your store. Here at HOST, we commonly see our clients run into two traps at this stage:
Skipping sales tax collection altogether
It’s easy to think “Well, let me get this store set up, then I’ll deal with the administrative hassles later.” Except, in the case of sales tax, for every taxable sale that you make without collecting, you are required to pay the sales tax due out of pocket.
Unexpectedly having to pay up 4-8% of each transaction eats into the small profit margins of what is already a new business.
Telling your shopping cart to collect sales tax in states where you are not registered
This is where a little knowledge can be a dangerous thing. Many sellers know enough to know that you are required to collect sales tax at least in your home state.
With Shopify’s onboarding process, it’s easy to simply check a box and start collecting sales tax from buyers in a state.
The trouble is, sellers are required to register for a sales tax permit with the state before you are allowed to start collecting sales tax. And not every Shopify seller picks up on that distinction.
Fast and easy onboarding with Shopify and other carts can create a situation where you are collecting sales tax from your Shopify buyers in certain states without the legal authority to do so. States consider this fraud.
Shopping carts like Shopify have made opening an online store down to a science. But sometimes making life too easy can cause big compliance problems for unknowing retailers.
The Solution: Slow Down for Sales Tax
We get it. You have your good idea, your catchy store name and your warehouse full of stock. You are ready to sell, sell, sell.
But hold on just a minute. Before you open for business, get sales tax compliant.
It isn’t as hard as it sounds (really!), and a little compliance now will save you big headaches in the long run.
How to Get Sales Tax Compliant Before Opening Your Online Store
Take these steps first to ensure you’re not paying sales tax out of pocket or running afoul of state sales tax compliance laws.
Step 1: Evaluate where you have nexus
Nexus is just a legal way of saying a “connection” to a state. You will generally always have a sales tax nexus in your home state since that is where you are doing business.
But other factors create a nexus, too. Including:
- A location such as a store, warehouse, or even a booth at a craft fair
- Employees, contractors, intsallers, salespeople and other personnel
- Storing inventory in a state
- 3rd party affiliates (people who send sales to your store online and get a cut of the sale)
- Temporarily doing business in a state such as at a conference, craft fair or tradeshow
So if you hire a contractor in a neighboring state to handle your customer support inbox or you keep a stock of inventory across the country so you can offer faster shipping to your coastal customers, you may have nexus in multiple states. Unsure where you have nexus? HOST has your back. We’ll perform a nexus analysis to ensure you are collecting sales tax in the right states.
Step 2: Register for sales tax permits
Once you’ve determined where you have a sales tax nexus, the next step is to register for a sales tax license and get sales tax compliant before you begin selling.
In the US, 46 states and Washington DC all have a sales tax. And because of the way the US is set up, states get to make their own rules and laws about sales tax. This means that there is no one easy central way to get registered. Instead, you need to register for a sales tax permit with each state.
That’s where HOST comes in. We have twenty-four years of experience helping retailers get sales tax compliant. That means we’ve been helping e-commerce sellers with sales tax since eBay was the top game in town.