In our last post, Ecommerce Sales Tax 101 we talked about what nexus even is and who it applies to. Today, we are going to go into more detail about what you need to do if you think your online shop has sales tax nexus in one or multiple states.
There are some steps that need to be done upfront and then ongoing tasks that need to be done as often as once per month. It’s important that you research and get sales tax set up correctly and then stay in compliance on an ongoing basis. If you are unsure where you have nexus and where you need to collect and file sales tax, please contact us for a Sales Tax Analysis. Here is our guide on how to get started:
- Register for a Sales Tax Permit. Any state that you have a connection (nexus) in, you will need to register for a sales tax permit so you can start collecting and filing your sales tax. Each state is set up a little differently but most can easily be registered online. You’ll find that most states do not charge to register while some will charge a small fee under $100. You’ll likely need your business name, start date, address, EIN, along with details like what type of products/services you sell and possibly even your estimated sales over the next 12 months. You do not want to register for the sales tax permit unless you know for sure that you are required to collect sales tax in that state because once you register, you now have an obligation to file and remit sales tax collected on the schedule they provide you. Most states will require you to file monthly, quarterly or annually based on your sales.
- Start collecting sales tax. Once you know that you are required to collect sales tax you need to actually start collecting the sales tax from your customers. If you are using a platform like Shopify or Etsy, they make this pretty easy. Typically you will need to tell the platform what states you want to turn sales tax on and whether this will be destination or origin-based. You may also have to choose specific districts, parishes or cities to make sure you know where you need to collect before you start this process. Once you have it turned on, your sales platform will automatically start to collect sales tax for sales made to the areas you have indicated.
- File and Remit Sales Tax. Now that you’ve started collecting the sales tax, you need to follow the state’s schedule and send them a report showing what you collected and then remit those taxes to them. If you are filing in multiple states, you may have some that are monthly, some quarterly and maybe even some annual filing. Keep track of these and be aware of due dates so you don’t end up filing late! Most sales platforms make it easy to pull a report and know what to file. There are also tax softwares like TaxJar* that can automate the filing for you if that is something you are interested in.
- Record the Sales Tax in your accounting software. This process can vary greatly depending on the accounting software you use and how you record your sales. In general, though, you’ll want to be sure that any sales tax you collect and any sales tax you remit is recorded in your software. Sales tax is almost treated as a deduction in the sense that a $60 sale may have included $2.00 in sales tax and you don’t want to overstate your income by counting that entire $60 as income.
- Re-Analyze your Nexus requirements at least once per year. As time goes by, your business changes and sales tax nexus requirements will certainly be evolving as well. More and more states will start to put policies in effect or even revise their policies over time. Just because you didn’t have nexus in a state last year does not guarantee you will not have nexus there this year. You’ll want to revisit your requirements at least once per year and make sure you are still in compliance.
Sales tax can be frustrating, intimidating and let’s be honest – sometimes it will even make you want to close the doors to your online shop! If you feel that way, don’t give up, reach out to us and see how we can help!
*This post does include an affiliate link for TaxJar and if you sign up for TaxJar using this link, we may receive a small compensation as an act of gratitude from TaxJar.