Understanding Online Sales Tax Laws

If you are selling products or services online, you may be wondering about internet sales taxes and how they apply to your business. Most U.S. states and some localities require online sellers to charge sales tax for online transactions. Larger sellers are typically the ones who need to collect and pay these taxes. The definition of a larger seller varies by state, based on sales volume, number of transactions, or both. With the complexity of internet sales tax laws, the best approach for small businesses is to utilize a sales tax app.

How Internet Sales Tax Laws Function

Sales taxes in the U.S. are governed by individual states, each with their own specific laws for businesses selling goods and services. Localities, such as cities and counties, also have sales tax regulations in some states. These laws dictate when a seller must charge sales tax based on the product or service, tax rate, and the business's tax nexus. With the rise of online sales, states have sought ways to enforce sales tax laws on these transactions. The 2018 Supreme Court case of S. Dakota v. Wayfair removed the "physical presence" rule, giving states the authority to require online sellers to collect sales tax.

A state's tax nexus is determined by the seller's business activities in the state, such as having a physical office, selling products in the state, having a distribution center, or employing workers there. With the removal of the physical presence rule, states can now mandate online sellers to charge sales tax on transactions. However, five states do not have sales tax laws, eliminating the requirement for online sellers in those states to collect sales tax.

Sales Tax Nexus for Remote Sellers

The Wayfair decision enables states to extend nexus considerations to remote sellers, those without a physical presence in a state but selling goods or services for delivery within that state. Most states only require larger retailers to impose online sales taxes, with the definition of a "larger retailer" varying from state to state based on sales volume or number of transactions. By 2023, 45 states will have laws mandating remote sellers to collect and pay state sales taxes on online transactions.

It's important for small businesses to understand their state's sales tax laws before engaging in online sales. Checking if you meet the threshold for online sales taxes in a state, familiarizing yourself with state and local laws regarding internet sales tax, and considering sales tax software are essential steps in navigating the complexities of online sales tax compliance.