Home Business Tax Tips
Do you sell products or services online? Are you aware of the tax implications? In this post, we’ll explain some of the laws and tax terms to help you understand how sales tax works.
Most people are conversant with sales tax, that additional percentage that stores charge to customers in various states.
If you own a store that is collecting sales tax, local as well as state sales taxes must be added to the customer’s account, collected and paid to the local tax authority.
However, if you are selling products or services online, you may or may not have the same sales tax collection responsibilities.
For online sellers to evaluate whether they must collect sales tax, they must first assess if their home state has a sales tax at all. Most states do levy sales taxes, but there are some like Oregon or Alaska that don’t.
Some towns and cities levy an extra sales tax. For instance, in California, the sales tax rate state-wide was 7.25% during 2019, and local districts could impose their own added sales tax.
The seller must be familiar with local tax rates and sales tax compliance, and make sure he or she is collecting it from his or her customers.
Several states that are collecting sales tax are exempt from taxation on specific items, like food products, for instance.
When are You Obliged to Collect Sales Tax for Online Sales?
The basic regulation for collecting sales tax for online sales is:
- If your business has a physical nexus (presence)* in a state, applicable sales taxes must be collected from online clients in that state.
- For those who don’t have a physical presence it is not necessary to collect sales taxes for online sales.
*A physical presence relates to any type of business facility in that state, i.e., an office, storefront or warehouse. Nexus also applies if you run a home business and you live in a State that collects Business Sales Tax.
Sales Tax Nexus
However, the US Supreme Court issued a ruling in June of 2018 that will probably change this exemption for collecting sales tax. States are obliged to begin collecting sales taxes irrespective of having a physical presence in their state.
Starting from July the 01st, 2019, economic nexus affects marketplace facilitators and remote sellers with aggregate taxable Arkansas sales that exceeds two hundred transactions or $100 000 during the existing or previous calendar year.
The Nexus expected between Seller and State
The term “nexus” is used by the law to outline the connection sellers must have with a specific area before they are necessitated to charge as well as collect taxes for online sales there.
Different courts and states demarcate this connection inversely. But most agree that if you have an office or a store in a state, this obliges you to collect and submit sales taxes in the state.
Some states have laws that outline eligibility factors, so make sure you familiarize yourself with them.
Selling in Many States
If you send inventory or products to a substantial, online company that distributes them on your behalf, you might have generated connections in multiple states apart from your own.
For instance, if you are selling online from your home in California, but don’t have a business presence in other states, you only have “nexus” with California.
However, if your products are sold on Amazon’s FBA program, your inventory is sent to Amazon first. This could mean you have to collect sales taxes from customers in the different areas where Amazon conducts business.
We hope you enjoyed these home business tax tips and found them helpful. Have we helped you unravel the tax puzzle and cleared up some of your concerns about collecting sales taxes, and sales tax filing for online sales?