Collecting and remitting sales tax is just one of the many responsibilities online merchants must deal with. Here is a basic outline of what merchants need to know and tips on abiding by local laws.
U.S. Sales Tax Laws
Determining which sales are subject to U.S. sales tax laws is pretty straightforward, thanks to a concept referred to as ‘nexus.’
The word ‘nexus’ is Latin for to bind. In the eCommerce context, nexus is a physical business presence within a state—such as an office, warehouse, or distribution center.
Online merchants must charge sales tax on any transaction made by a customer in the company’s nexus states. If you possess nexus of any kind within a state, then you are obliged to comply with the specific state, county, and municipal sales tax regulations of that state.
To demonstrate, let’s say that your entire company is located in Florida. In this case, any customers from Florida would need to pay taxes, but those shopping from any of the other 49 states wouldn’t need to pay taxes.
However, if you have an office in New York and distribution centers in California and Georgia, you will be responsible for charging applicable taxes to customers in all three states.
When it comes time to collect taxes and submit payments to the appropriate entities, there are several things to note:
- There are six states—Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon—that do not charge a sales tax.
- In the states that do charge sales tax, many have exemptions for certain items, like clothing or food.
- If you are unsure whether or not a particular facet of your business qualifies as a ‘physical presence’ within a state, it’s best to contact that state’s revenue agency. Officials will provide guidance regarding all tax regulations and requirements.
- Before you can start collecting sales tax in a particular state, you will have to obtain a sales tax permit.
- Determining when sales tax payments are due will depend on the state. Generally, payments are made monthly, quarterly, or annually.
- Merchants typically use automated shopping cart software to calculate and collect sales tax. However, this automation should be coupled with human analysis. For example, merchants will want to double check that shoppers visiting from all channels (desktops, tablets, phones, etc.) are being charged the correct amount.
European Sales Tax Laws
Once you become accustom to domestic sales tax laws, the process is not overly-complex. However, when selling to other countries, the situation grows a little murkier.
In the European Union, each country requires online sellers to charge a Value Added Tax (VAT), which can vary anywhere from 15-27 percent of a transaction, depending on the country.
As of 2016, the VAT rate is determined based on the point of consumption, rather than the point of sale. This means the VAT assessed is based on where the customer lives, rather than where the business operates.
Until 2014, VAT calculations were the complete opposite of the current policy. eCommerce VAT rates were formerly decided by the merchant’s location. However, businesses often managed to work around the tax by establishing a subsidiary in a low-VAT country. For example, a business might move from a country with a relatively high VAT, such as Hungary (VAT of 27 percent as of 2016) to a lower-VAT country like Luxembourg (VAT of 17 percent). This way, they could lower prices without simultaneously affecting costs to the business. The new laws enacted in 2014 prevent this practice of tax fraud.
VAT regulations are subject to change at any time. At present, the EU is already planning for further revision to VAT policies for cross-border eCommerce between member states. In 2017, the EU plans to introduce new guidelines aimed at simplifying the VAT in order to facilitate cross-border trade and support the growth of SMBs throughout the single market.
Be Conscious of Taxes
Sales taxes are used to pay for very important things—like schools, roads, and public safety. It is essential that online merchants fulfill local and international laws. Neglecting to identify customer locations and charge the appropriate tax rate could ultimately result in stiff fines—which are much higher than the cost of the unpaid taxes.
Selling online comes with many rewards, but also demands great responsibility. Sales tax is one such detail that merchants must give their full attention.
Photo by Stuart Miles/FreeDigitalPhotos.net
Monica Eaton-Cardone is Co-founder and COO of Chargebacks911.com.