COVID-19 has changed our daily lives in many ways. More than ever, consumers around the world are relying on online shopping and ecommerce businesses to safely shop from home. This has led many sellers to embrace ecommerce or expand their online presence. According to Signifyd, ecommerce sales were up 104% in June 2020 over June 2019, and 99firms reports that 80% of Internet users in the US have made at least one purchase online in 2020.
While some of the world’s changes during 2020 will prove to only be temporary, the rapid increase in ecommerce will have a lasting impact on businesses around the world. As a result, governments around the world are implementing new tax policies for 2021. Although taxes can be overwhelming, they are a necessary aspect of running a successful business. In this article, you'll get a quick rundown of ecommerce sales tax and compliance and regulations to be aware of in 2021.
What is eCommerce Sales Tax?
Sales tax is calculated by tacking on a small percentage of a sale by an online retailer. There is no national sales tax in the United States, but 45 U.S. states and the District of Columbia have a sales tax. Additionally, many cities and local areas are allowed to tack on a special sales tax. Online realtors will need to be aware of different sales tax laws and rules when calculating sales tax for consumers across the country.
Online retailers are responsible for charging the correct amount of sales tax and remit the taxes collected back to the appropriate state. To know if you owe taxes in a certain state, there are two concrete rules: your business has sales tax nexus in the same state as your customer and the product you are selling is taxable in that state.
If you are an online retailer with some connection to a particular state (nexus), you are on the hook for paying sales tax. However, there are certain exceptions for some states. Additionally, you’ll always have nexus in your home state. Here are some factors that determine whether you have nexus in other states:
- Physical location: office, warehouse, branch, etc.
- Inventory: storing inventory in a state will cause nexus (even if you have no physical presence of personnel there)
- Personnel: employees, sales people, distributors, or any other person doing work in a state for your business will qualify you for nexus
- Economic nexus: you exceed a mandated amount of sales in a state or you make over a certain amount of transactions
- Affiliates: If someone who advertises your product in exchange for cut of the profits lives in a certain state, you qualify for nexus in that state
For more specific information about sales tax nexus by state, check out the Economic Nexus State Guide.
Stricter Enforcement in 2021
Economic nexus laws (as described above) and marketplace facilitator laws were originally implemented in 2018 to drive revenue for tax authorities through the collection of taxes owed on online sales. However, enforcement of these laws has been minimal because authorities wanted to give sellers and marketplaces time to understand and comply with the new regulations.
However, in 2021, the grace period has ended. The increased consumer interest in ecommerce and the economic impact of the global pandemic has catalyzed enforcement for 2021. Many states have utilized AI and data mining techniques to efficiently pinpoint non-compliant businesses and remote sellers.
Before applying for a sales tax permit, determine that you have a nexus in a state and that you’re selling taxable items there. Now it is time to get compliant and register for a permit. To do this, contact your state’s taxing authority. Next, set up a system to start collecting sales tax online. Determine whether you should collect “origins-based” or “destination-based” taxes. Finally report and file sales tax according to a predetermined schedule (monthly, quarterly, or annually).
Wrapping it Up
Taxes are an essential part of any business. If you are selling a significant amount of products or services online, it is worth it to invest in software that automatically calculates sales tax for transactions. aACE enables you to easily set up tax profiles for every state and individual jurisdiction where you do business. And for more complex requirements, our integration with Avalara AvaTax uses geolocation for precise, up-to-date tax rates every time you make a sale. To learn more about the aACE+ AvaTax integration, check out our feature highlight.