How to Collect Sales Tax for Online SalesIf you own and run a physical storefront within a state that collects sales tax then you are obligated to collect sales tax for every sale made to all customers who walk through your door.
If you own and run an internet business from your home or small office then you are still obligated to collect sales tax for every sale made within your home state. |
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How to Collect Sales Tax for Online Sales
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Your physical location is wherever you run your business from. However, at this time, you do not have to collect sales tax for sales made outside your home state or any other state as well. You only collect sales tax for sales made within your home state and nowhere else.
From the U.S. Small Business Administration (SBA) “If you do not have a physical presence in a particular state, then you are not required to collect sales tax from customers in that state.” U.S. Small Business Administration (SBA) |
“This rule is based on a 1992 Supreme Court ruling (Quill v. North Dakota, 504 U.S. 298) in which the justices ruled that states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state. The Court reasoned that forcing sellers to comply with more than 7,500 tax jurisdictions was too complex for sellers to manage, and would put a strain on interstate commerce.” U.S. Small Business Administration (SBA)
There are some states however which do not collect or have a sales tax.
States which do not have a sales tax:
-Alaska
-Delaware
-Hawaii
-Montana
-New Hampshire
-Oregon
If you’re running your internet business from within any of the states mentioned above then at this time you do not have to collect sales tax. And neither do you have to collect sales tax for sales made from any other state as well.
You only collect sales tax in your home state -if- your state has a sale tax.
There are some states however which do not collect or have a sales tax.
States which do not have a sales tax:
-Alaska
-Delaware
-Hawaii
-Montana
-New Hampshire
-Oregon
If you’re running your internet business from within any of the states mentioned above then at this time you do not have to collect sales tax. And neither do you have to collect sales tax for sales made from any other state as well.
You only collect sales tax in your home state -if- your state has a sale tax.
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Collecting sales tax online
Colleting sales tax online is a simple matter of adding the sales tax rate for your jurisdiction to your shopping cart for sales made within your home state.
All shopping cart systems allow you to add sales tax and a sales tax rate for sales made within the state(s) of your choice from within the admin area of the shopping cart program. And if a customer who is living in your home state places an order online then the shopping cart will automatically add the sales tax rate (6%, 7%, 8% etc) to the total price of the sale. (The shopping cart system will not add any sales tax for sales made from any other states other than your own).
Once the customer completes the order then those funds (with sales tax included) are processed and deposited into your bank account within 1 to 2 business days. Then it becomes your responsibility you separate those sales tax funds from the funds of the sales and profits and to send the sales tax funds to the IRS quarterly, (or every 4 months).
NOTE: It’s important to keep a record on every sales tax dollar brought into your business in order to be able to give an account for these dollars should the need ever arise, (i.e. a tax audit).
The IRS will send you self addressed payment envelopes every 4 months to make the payment process easier for you. Then simply write a check for the amount of the sales tax dollars you collected for those 4 months and then mail it in to the IRS.
All shopping cart systems allow you to add sales tax and a sales tax rate for sales made within the state(s) of your choice from within the admin area of the shopping cart program. And if a customer who is living in your home state places an order online then the shopping cart will automatically add the sales tax rate (6%, 7%, 8% etc) to the total price of the sale. (The shopping cart system will not add any sales tax for sales made from any other states other than your own).
Once the customer completes the order then those funds (with sales tax included) are processed and deposited into your bank account within 1 to 2 business days. Then it becomes your responsibility you separate those sales tax funds from the funds of the sales and profits and to send the sales tax funds to the IRS quarterly, (or every 4 months).
NOTE: It’s important to keep a record on every sales tax dollar brought into your business in order to be able to give an account for these dollars should the need ever arise, (i.e. a tax audit).
The IRS will send you self addressed payment envelopes every 4 months to make the payment process easier for you. Then simply write a check for the amount of the sales tax dollars you collected for those 4 months and then mail it in to the IRS.
Exemptions
There are a few instances where you do not have to collect sales tax even if the sale was made within your home state. For example; if you’re selling electronics, and another reseller needs to purchase one or multiple items from you solely for the purpose of reselling those items to their customers then you are not obligated to collect sales tax for those sales, as long as they provide a resale certificate (tax id license) when making the actual purchase.
There are also some products which are tax exempt as well. And each state makes its own rules. Typically however, most products sold to end users are taxable.
Major exemptions are:
-prescription drugs;
-food, especially groceries and non-prepared food;
-animal feed, seed, and many agricultural products;
-products for re-sale - raw materials, inventory, other items that are going to be sold, rather than used by your customer.
And many times, services are also tax exempt as well. This however varies from state to state.
Sales tax rates and rules change from time to time. To check for state tax rates and rules for your state, city or county, please visit the Sales Tax Clearinghouse www.thestc.com
Collecting sales tax online is not that difficult to do considering that most of your orders will come from ‘out of state’ and thereby not having to collect sales tax. However, if you do have to collect sales tax then your shopping cart system will do all the work for you. And all you’ll have to do is send those sales tax funds in to your local IRS office quarterly.
There are also some products which are tax exempt as well. And each state makes its own rules. Typically however, most products sold to end users are taxable.
Major exemptions are:
-prescription drugs;
-food, especially groceries and non-prepared food;
-animal feed, seed, and many agricultural products;
-products for re-sale - raw materials, inventory, other items that are going to be sold, rather than used by your customer.
And many times, services are also tax exempt as well. This however varies from state to state.
Sales tax rates and rules change from time to time. To check for state tax rates and rules for your state, city or county, please visit the Sales Tax Clearinghouse www.thestc.com
Collecting sales tax online is not that difficult to do considering that most of your orders will come from ‘out of state’ and thereby not having to collect sales tax. However, if you do have to collect sales tax then your shopping cart system will do all the work for you. And all you’ll have to do is send those sales tax funds in to your local IRS office quarterly.