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sales-tax-for-online-sellers-business-guide
December 22, 2022
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8
min read
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Written by: 
Nikolaus Hilgenfeldt
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Category:
Finance

Sales Tax For Online Sellers - Small Business Guide

There are many things to worry about as a small business owner. When you started selling online, you were probably excited about every purchase. 

And with every product sold, it was exciting to see how your brand evolved and gained attention.

However, it's easy to overlook the nagging administrative details when working hard to build your business.

And one of the most vexing of those is sales tax. 

So, in this guide, we'll walk you through the basics of sales tax for online sellers.

It will help you determine where and when you're liable for sales tax for America and Europe.

So, if you're interested in finding answers to the most common online sales tax questions, keep reading!

What Is Online Sales Tax For Online Sellers?

Online retail transactions have seen a sharp rise in volume over the past ten years.

And for quite some time, online sellers were in a loophole.

Understanding how sales tax for online sellers works can take time and effort. 

Different states have various sales taxes and laws determining which transactions are subject to sales tax. 

But, grasping the sales tax regulations in your state and how they affect your obligations as a business owner is a crucial element of successfully running a business.

If we want to put it simply – a sales tax is a consumption tax imposed by state or local governments on the sale of goods or services consumers pay when purchasing.

However, understanding who is subject to sales taxes can be trickier if you offer services online.

Like when a consumer is charged a tax in-store and must pay a percentage during the payment process, eCommerce sales tax operates similarly.

Still, the fact is that there isn't a separate tax intended only for online purchases.

Instead, tax legislation has recently been revised to recognize our digital lifestyles and that operating a business in a state no longer necessitates having a physical office, warehouse, or retail.

Understanding Online Sales Tax in the United States

There isn't one universal sales tax in the US. It means that sales tax administration is done by individual states.

Because of this, the rates, guidelines, and legislation governing the 45 states that impose a sales tax vary.

In addition, county and locality-specific sales tax rates are also possible.

What Happens If You Fail To Apply To Sale Tax Regulations?

Sales taxes account for around one-third of all state tax receipts.

Still, many vendors, including Amazon, didn't pay any of it, which led to losing billions of tax revenue.

However, following the Supreme Court's Wayfair decision in 2018, states could finally mandate that ecommerce vendors collect taxes from their buyers

What does it mean?

As a small business owner, you pay the sales tax related to internet purchases, not your customers.

Businesses often shift this liability to customers by adding sales tax at the end of sale. Still, state and local tax authorities will hold the seller liable if they don't.

In addition, late payment fines, interest charges, and collection costs may be imposed.

If it is determined that tax evasion has occurred, harsh measures such as criminal charges could be applied. 

To sum it up, the fundamental guideline for sales tax collection for online sellers is:

  • Your company has a sales tax nexus in your client's state.
  • In that state, the product is subject to tax.
sales-tax-united-states-nexus-standards

Basics of paying sales tax for online sellers

As we said, the states are collecting taxes by law. But who actually collects sales tax? The marketplace or the internet retailer? Where do you obtain the sales tax? What is the deadline for gathering and sending sales tax?

What Is the Sales Tax Nexus?

The 50 states have differing views on a single definition of nexus. Furthermore, the criteria for defining nexus are continually evolving.

As a result, you should know each state separately when calculating its sales tax nexus.

states-with-economic-nexus-laws-graph

Still, most states argue that a business has sales tax nexus if it meets the following standards:

  • A location, like a home office or a workplace within a state.
  • Stuff, like a salesman, contractor, or an employee in the state.
  • Maintain inventory, own a warehouse, or ship goods from one in the state.
  • Do business there, perhaps at a trade exhibition or craft fair.
  • Possess a local affiliate.
  • Drop ship from a local third-party supplier.
  • Economic nexus: You exceed the minimum quantity of sales required by the state or the minimum number of transactions required by the state.

The number of states where you must collect ecommerce sales tax will rise as your company and customer base expand.

Fortunately, you are not required to collect sales taxes if you sell to customers in a jurisdiction where you have no nexus.

states-that-dont-have-sales-tax

Note that it is best to check official state websites for the latest Nexus requirements by state.

How To Comply With The Rules For Sales Tax For Online Sellers

The following procedures must be followed to properly manage sales tax: determination, registration, collection, filing, and remittance.

1. Sales tax determination

A sales tax object can be a physical or digital item, a service, or a combination. It's crucial to comprehend an object's taxability because under-collection can lead to audit assessments, and over-collection can lead to potential class action lawsuits.

2. Sales tax permit registration

In your nexus state or the state where your company has a physical address, submit an application for this permit. You don't need to be concerned about online tax collection if your nexus state doesn't impose a sales tax.

Remember that it is against the law in some jurisdictions to collect sales tax without a permit. In addition, a state-issued filing frequency specifies how frequently you must submit sales taxes will also be included with your sales tax permit.

Typically, you will file once per month, once per quarter, or once per year.

3. Collect and File Sale Tax

The next step is to start collecting sales tax after applying for a business license in the states where you have nexus. 

Following the filing frequency specified at registration, you must submit a sales tax return after you have begun collecting sales tax.

When submitting a sales tax return, you must break down the sales tax you have collected by jurisdiction (state, county, city, special, etc.).

Tips On How To Efficiently Navigate Online Sales Tax Process

  • While this whole process may be challenging and confusing for many, it is important to invest time and learn about tax regulations that apply to your business.
  • Additionally, keep track of every interaction your business has with a different state to avoid unintentionally triggering nexus.
  • Also, set calendar reminders once your state has given you a deadline for completing your taxes to avoid filing them late and paying fines.
  • And lastly, read all the setup and management instructions for sales tax collection provided by your eCommerce or accounting platform. If you can put things up correctly from the beginning, it will make your life much easier as your business expands. 

Online Sales Tax In Europe 

Distance selling, or online sales to European consumers, has grown tremendously quickly. Within a few years, eCommerce is expected to make up more than 30% of retail sales in the EU. 

However, it obliges retailers to comprehend each EU member state's VAT obligations and costs. Any online retailer who doesn't comply risks investigations and possible fines.

On July 1, 2021, new Value-Added Tax (VAT) regulations for online purchases were enacted to establish more level playing fields for all businesses.

Businesses exporting goods to consumers in the EU and companies selling beyond the EU's national boundaries will be impacted by this.

Whatsmore, it helps the EU's taxation system become more equitable and straightforward and modernizes the VAT to reflect the reality of the eCommerce business. 

digital-services-taxes-in-europe

This includes the following significant adjustments for sales tax for online sellers:

  • The implementation of the Import One-Stop Shop (IOSS) return and the end of the low-value import VAT exemption. 
  • Some sellers will be able to record all of their pan-EU sales on a single VAT return in their home country instead of needing numerous VAT registrations around the EU.

By lowering compliance requirements, the goal is to promote trade within the EU's digital single market and increase cross-border online trade.

Also, VAT marketplace responsibilities were reformed in the UK from January 1, 2021.

Additionally, member states are attempting to close the €5 billion gap in eCommerce VAT fraud due to the amendments. 

The Changes In Sales Taxes For Online Sellers In EU

The VAT threshold, the rate that applies to international orders, and tax reporting for EU enterprises have all undergone three significant changes: 

  1. Eliminating the restrictions on distance selling Once a country-specific threshold is reached, EU businesses must register for VAT in other nations. Unless the micro-business level applies, cross-border sellers are required to charge the VAT rate of the buyer's country of residency from their first sale. 
  2. The new micro business threshold for the entire EU – There is a new exemption for micro businesses having headquarters in one EU country and annual sales of under €10,000 over the previous two years. For all EU countries they ship to, merchants eligible for this exemption may continue to charge the local VAT rate of the EU country where the cargo originated and pay their local tax authority.
  3. One-Stop Shop (OSS) filing allows businesses to submit a single VAT return covering numerous EU countries and eliminates the need for separate tax registrations. OSS makes filing easier and spares them from the hassle of registering in numerous nations. The retailer must use its domestic OSS portal to submit an electronic quarterly VAT return and maintain records for the next 10 years.  

Conclusion

The internet economy of today makes entering new markets more accessible than ever. Still, online sellers must bear the responsibility of comprehending the tax regulations in each country.

Making informed decisions and fully utilizing any available exemptions can help offset the cost of doing business in the quick-paced world of eCommerce. 

So, how can Myos help your online business?

Now that you are familiar with sales tax for online sellers, why not take a leap and grow your business? 

Whether you need to go across the border or the pond, Myos can assist you in setting up a dependable source of cash flow that can support your growing business.

As a dependable growth partner, Myos has your back and offers loans based solely on your goods.

And the best part is, as long as you sell products, you can pay the loan back whenever, and you only have to pay interest based on the time you use money.

The following criteria must be met by your ecommerce business to qualify for an asset-based loan from Myos:

  • It is registered in the UK or the EU.
  • You have been running a business for at least 6 months.
  • You used one of the eCommerce platforms, like Amazon, eBay, online shop, etc., for at least 50 days.
  • Your products have a minimum shelf life of one year.
  • A product's minimum price is 5 EUR (EU) or 5 GBP (UK).
  • Your products are now available for sale.
  • COVID-19, branded watches, ammunition, and weapons aren't included in your offerings.

What does Myos offer?

  • AI evaluation of your products
  • Financing solutions for D2C and marketplace sellers
  • Loan range £10,000-£2,500,000
  • Only goods as collateral
  • No personal guarantee or liability
  • Online application in 3 steps
  • Fast financing (24h-72h)

Does this sound tempting?

Then, join Myos today to launch your business idea with dependable funding, fast and hassle-free!

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