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Ecommerce Sales Tax Simplified, with TaxHero CEO Lahari Neelapareddy
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Ecommerce Sales Tax Simplified, with TaxHero CEO Lahari Neelapareddy
Sales tax has always been a pain point for many businesses, especially the small ones because of its complexity and the always changing laws. With physical stores, filing the sales tax was simpler because there was only one place where tax had to be collected and paid. But with eCommerce stores, the place where the sale is made can be in different states and this poses a challenge for many eCommerce business owners.
The Basics of eCommerce Sales Tax
Sales Tax Nexus
When talking about a sales tax nexus, this generally refers to the connection between a business entity and a taxing jurisdiction. This connection is important because without establishing this, sales tax cannot be imposed.
There are two types of nexus:
Physical Nexus. The physical presence of a store in a state means that a sales tax will be imposed and collected.
Economic Nexus. This nexus is what online sellers need to watch out for. Depending on the threshold, certain states impose sales tax laws to be collected even without the presence of physical stores.
Buyer / Seller Location
State sales tax is in play here. There are cases when the sales tax rate is based on where the product is delivered – a method that is followed by most of the states in the US. Some state requires to apply a tax rate based on the origin of the seller.
Goods Eligible for Sales Tax
The basis of sales tax collection is first and foremost determining whether what you sell is taxable or not. Certain goods are not eligible for sales tax in some states but are taxable in other states. This determination is extremely important because you could be paying taxes on items that you don’t have to.
Facilitator Laws
For smaller eCommerce businesses, certain marketplace platforms such as eBay, Amazon, or Etsy are authorized to facilitate and therefore, collect and remit sales taxes on behalf of remote sellers. This eases the burden of tax compliance on small businesses.
Tax Compliance
When the tax nexus has been established, the next step is to register for a sales tax permit in each of the states where they identified that they have nexus. Sales taxes need to be collected when the sale is made, file the sales tax calculation, and remit it to the state.
International Sales Tax
Sales tax regulations vary by country and if you are selling online internationally, the tax laws of these countries need to be observed too. For example, some countries charge Value Added Tax (VAT), while some charge GST.
Use of Tax Software
Automating your taxes ensures that you avoid hefty fines and penalties. Many eCommerce businesses choose to process taxes through tax software to simplify the entire process of tax computation, filing, and remittance.
Challenges of Complying With Sales Tax For Online Sellers
Before starting your eCommerce business, it is helpful to understand the challenges that you will be facing in terms of sales tax compliance. This will allow you to prepare for what you need to do and avoid costly mistakes.
Knowing the nexus requirements of the states where you will conduct your business. Local sales taxes are different for each state. This goes beyond the physical presence of your business.
With the nexus identified, the next thing that you need to do is to determine the tax rules and regulations that apply to your business.
You must have the necessary sales tax permit for each state.
Tax rules and regulations change constantly. You need to keep yourself abreast of these changes and be compliant.
Even when your sales taxes are collected, filed, and remitted under facilitator laws, you still have to understand how the whole process works.
Tax audits happen regularly. Fines and penalties are imposed for a variety of reasons and you have to make sure that you are compliant with the local sales tax laws.
When you have a business in ecommerce and sales tax is a requirement, this can be challenging at first due to the many compliance requirements that you have to follow, not to mention the computation that needs to be done.
Understanding the compliance requirements also means knowing how the computation is going to be done even when you automate your taxes.
The important factors that need to be considered when computing the sales tax are as follows:
Identify your sales tax nexus.
Determine the tax rates applicable to you in the state and locality of said nexus.
Classify the goods that are taxable or not.
Calculate the sales tax due: Sales Tax = Total Taxable Sales x Applicable Tax Rate
Deduct discounts and exemptions from taxable sales.
Check if you need to automate the calculation of sales taxes.
Make sure that you file and pay sales tax on time.
Watch out for updates on tax rules.
Important Sales Tax Tips For Online Businesses
Many online businesses worry about sales tax and compliance requirements but there are tips to help you stay compliant and avoid paying penalties and fines on top of your tax payable:
Growing businesses need to make a regular review of their nexus for sales tax ecommerce computation.
Make sure that you have all the necessary tax permits in the state where you have nexus. You cannot collect taxes where you do not have a permit. Otherwise, you will be faced with penalties.
Choose to automate your taxes especially when you have nexus in multiple states. When you do, there is tax software you can integrate with your eCommerce platform.
State taxes and rules are constantly changing. To stay compliant, make sure that you are aware of these changes and that you understand them.
Keep all documents and certificates related to your taxes. This includes exemption certificates, filed returns, tax permits, etc.
File your taxes on time. Some states require sales taxes to be filed and paid monthly while others need to be filed quarterly. In cases where you have zero returns, you still need to file your return.
Be prepared for tax audits. This can happen at any time so make sure that you have documented accurately. When needed, you can consult with a tax professional to help you out.
Make sure that you are also compliant with international sales tax laws. Countries have different tax rules for online businesses as well.
If you have a growing and thriving business with a presence in multiple states and countries, hiring a tax professional is essential.
Being compliant with sales tax laws can help you run your ecommerce business smoothly and focus on scaling instead of having to deal with tax compliance issues and paying penalties instead of using that money on more important business ideas.
Simplified Sales Tax For Ecommerce
Filing the sales tax for ecommerce can be a time-consuming process especially if you have sales tax nexus in multiple states that have different tax rules. But there is a way to simplify this process for you so you focus on managing your ecommerce business. Here’s how:
Do not be afraid of investing and using tax software. It computes the sales tax automatically, affording you more time to work on more important things to do for your business.
Consolidate sales tax data. This is applicable if you sell on different platforms that also cater to different states across the country. Centralizing tax management saves you time and ensures you do not miss out on any of the filings due.
Correct classification of taxable goods and usage of correct tax rates. Make sure that correct tax rates are entered into the software and that goods are classified correctly as well. Furthermore, if there are updates to the tax rules, they must be reflected in the software as well.
Organize your sales records and documents. Come tax audit, you should have all the files you need in one place and confidently show how the taxes are computed.
Hire tax professionals. Managing taxes is understandably complicated and requires studying and understanding taxation laws. But when you hire tax professionals, they will be able to make sure that your business is compliant while you focus on increasing your ecommerce sales.
Assurance From Taxhero CEO Lahari Neelapareddy
In this podcast, Lahari Neelapareddy has outlined the many benefits of ecommerce businesses who choose to automate their sales tax computation and filing through the help of Taxhero. With the many complexities of tax rules, she has managed to simplify the whole process through their software.
The services offered by Taxhero include simplifying the many pain points of ecommerce businesses such as the following:
Checking and identifying nexus.
Sales tax permits registration.
Tax Reports at a glance.
File the appropriate charged sales tax and remit to the appropriate state.
Support during tax audit.
Communicate any updates on tax laws.
Take care of back taxes and work on reducing penalties and interests.
Integrate to the ecommerce platform – Shopify for the time being.
Lahari is an accountant and understands the importance of the correct implementation of sales tax laws in ecommerce.
Different Sales Tax Strategies For Online Stores
To avoid future compliance problems, there are strategies to implement for applying the sales tax on ecommerce. A lot of these strategies apply not only to big online stores but also applicable even for smaller ones.
The different strategies you can implement include the following:
Tax Automation
Consolidation of Tax Data
Leveraging Marketplace Facilitator Laws
Nexus Management
Products Category Matrix
Tax Compliance Outsourcing
Internal Tax Audits
Sales Team Tax Training
Regular Sales Tax Review
With the implementation of the above strategies, expensive mistakes can be avoided and business owners will have peace of mind knowing that they are compliant with the sales tax laws.
Ecommerce Sales Tax Best Practices
To ensure that you remain compliant with your ecommerce sales tax for 2025, you and your team must apply these best practices in your business:
Make sure that you are updated with the sales tax nexus and any changes in the nexus laws of the state.
Register your sales tax permits on time to avoid penalties.
Make use of tax automation software.
Get help from tax experts.
Document tax processes and records.
File and pay taxes on time.
Conduct internal tax audits to prepare for state tax audits.
Tax laws need to be understood and implemented in the business. Failure to do so will be very costly for the business and can create a lot of issues later on.
Automating Sales Tax For Ecommerce
Without a doubt, automating the entire sales tax process of your business is more beneficial for you than choosing to do it manually. But before you choose to automate tax compliance, you need to make sure that the software supports the specific needs of your business.
Choose the right software that your business needs. The popular software includes Taxhero, Avalara, Vertex, Taxjar, and Taxify. Try out the software first including its features.
Your tax software should fully integrate with your ecommerce platform. This reduces the administrative task of inputting records and reconciling.
Sales taxes due must be automated and updated. The accuracy depends on the correctness of the data input, especially the product matrix and tax rates.
The tax software should offer automated filing and scheduled payment of tax returns. This can avoid hefty penalties in the future due to late filings.
Accuracy is very important when it comes to complying with tax rules and regulations. This is simplified with the use of automated tax software. Given the changing landscape of how online businesses work, sales tax laws are also constantly changing and online sellers need to keep up with these changes to ensure their business runs smoothly.
