Benjamin Franklin said “in this world nothing can be said to be certain, except death and taxes”. As a business owner, you relate to this all too well (or you soon will). One of the more time-consuming and confusing tasks your business will run into is juggling the various states’ sales taxes.
Before the advent of the internet, sales tax was easy - you charged sales tax for all sales in your storefront. Now, the internet gives your business the ability to sell across the country and the world. So how do you know when and where to collect sales tax?
I will preface this by saying you should always check with your local and state laws to confirm how your state handles sales tax.
But generally, if you sell physical (tangible) products, then you will be required to collect sales tax in the state your business is located. Unless your products or service is tax exempt (again, check your local laws), you will need to apply for a sales tax ID.
So if you make custom T-shirts in New York, then you need to apply for a New York sales tax ID. Then whenever you sell a T-shirt to a customer in New York, you will collect the proper sales tax. But when a customer in Texas buys a T-shirt, you won’t collect sales tax.
As an online business, you automatically have nexus where you have a physical presence. So as stated above, the state your business is registered in and have a physical presence in, will automatically be considered a state that you need to collect sales tax.
If you open an office, warehouse, or retail store in another state, suddenly you have nexus in that state too.
But after the 2018 US Supreme Court ruling in North Dakota v. Wayfair, it is now possible for states to charge and collect sales tax on out-of-state merchants making sales into their state.
So with the example of a New York business, before you only needed to collect New York sales tax. But now, all your sales into the other 49 states could be subject to sales tax.
How am I supposed to manage all this?
If collecting, filing, and remitting sales tax on several states each with different due dates and filing frequencies sounds difficult, that’s because it is.
Collecting: Luckily Shopify makes it easy to collect sales tax. Going into settings -> taxes will allow you to easily enable or disable tax for each state. Then as your store receives orders, Shopify will automatically collect the correct amount of state and local sales tax required.
Filing: In order to file the tax you collected on time, you’ll have to log into your state filing service. Each state has a department (Department of Taxation, Department of Revenue, Department of Finance, etc) that handles sales tax registration and collection.
Remitting: Now that you’ve filed your monthly, quarterly, or annual sales tax (the state will tell you how often you need to file), now all you need to do is transfer the sales tax to the state from your business bank account (some states will even let you use credit cards).
Now Automate It
Dealing with state taxes as a small business owner can be time consuming, especially if you’re filing monthly. Luckily there’s a convenient and powerful tool called TaxJar.
TaxJar takes all the guesswork out of sales tax collection. By integrating directly with your Shopify store as an app, it automatically processes your sales and shows you each state you’re collecting tax in, with a filing due date for each state. It also integrates with all other major eCommerce platforms and marketplaces like BigCommerce, Etsy, and Amazon.
TaxJar has a tool that helps you find which states you might have economic nexus in. When I had my first sale in Kansas, TaxJar sent me a notification letting me know that I now have nexus. TaxJar also equipped me with a guide for Kansas sales tax, including how and where to register for a Kansas sales tax ID. Their extensive blogs and guides on sales tax cover each state and are a treasure trove of knowledge that can empower you with everything you need to know about collecting sales tax in yours.
What’s even better, is that TaxJar will even automate the filing process for you. If you never want to touch or deal with sales tax, TaxJar’s auto file feature will take care of all the state filing.
At $20 a month, using TaxJar has saved me hours of dealing with taxes monthly and kept my business compliant with all the states I have nexus in. I highly recommend it to anyone who values automating business processes, especially one as difficult and strict as sales tax. After all, why worry about audits and trouble with state tax enforcement officers when you can shift the responsibility to TaxJar? That’s what I do.