Sales Tax Guide for International eCommerce Companies

Do you sell and ship products to customers the U.S.? Did you know that whether or not your company is based in the U.S., you may still be required to remit sales taxes? On June 21, 2018, the U.S. Supreme Court ruled in favor of a new precedent-setting case that directly impacts the sales tax nexus requirements for businesses that sell to U.S. customers.

To make matters more complicated, tax requirements can vary significantly on a state by state basis. What does this mean for your business? And how can you ensure your company is compliant? Today we’re diving into everything you need to know about the new sales tax requirements.

You’ll get answers to the following questions:

What is sales tax?
What is sales tax nexus?
What factors determine sales tax nexus?
How do I know if I have nexus in a state?
How can I ensure my business is sales tax compliant?
Are my products taxable?
Is shipping taxable?
Is gift wrapping taxable?
How do I register for a sales tax permit?
How do I set up sales tax collection in nexus states?
How does this impact a drop-shipping business?
Is my business at a disadvantage compared to my competitors?

By the time you’re done reading this guide, you should have a clear understanding of what next steps you need to take so you can ensure your business is sales tax compliant. Read on to ensure you don’t have any surprises when taxes are due!

Before we begin, we need to make sure we’re both on the same page…

Disclaimer: The information contained on this site does not constitute tax advice or an accountant-client relationship. This information is intended as general guidance on matters of interest only. Due to the complexity of tax law and the changing nature of laws, rules, and regulations, the information contained on this site may not always be accurate. Accordingly, the information on this site is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. You should consult with your tax professional regarding your specific circumstances.

Now, let’s talk sales tax!

Grab a drink and be prepared to jot down any specific questions that come to mind as you read this guide. You’ll want to consult a tax professional regarding your unique circumstances.

What is sales tax?

Sales tax is a percentage of the total sales price of taxable goods and services. Sales taxes are imposed by states and local areas such as cities, counties, and other special taxing districts. So not only do 45 U.S. states and D.C. impose sales, but also local areas within those states can impose sales tax. There is no federal sales tax in the U.S.

Sales taxes are consumption taxes, which means they are charged in conjunction with a purchase of applicable products or services.

Why is sales tax imposed on your business? In short, these taxes are generally used to help fund public budget items such as education, public safety, roads, emergency services.

Each state has its own sales tax rules and laws. Thus, every state your business has nexus in will have its own set of rules and laws that you’ll need to ensure compliance with.

The rules of sales tax can vary significantly between states, including aspects such as:

Which types of products and services are considered taxable;
Percentage of sales tax to be charged; and
Timing, frequency, and deadlines of required sales tax return filings.

As of this writing, these five states in the U.S. do not have a sales tax:

Alaska
Delaware
Montana
New Hampshire
Oregon

As an eCommerce business, your company is required to collect sales tax from some or all of your customers. Which customers should you be collecting sales tax from? This depends on the states in which your business has sales tax nexus. (We’ll discuss this in a minute.)

After you collect applicable sales taxes from your customers, you’re required to report the taxes and remit them to the state.

What is sales tax nexus?

Nexus is a significant connection to or presence within a state. If you have nexus in a state that means your business is required to be compliant with that state’s sales tax rules and laws.

To put it simply, your business is required to collect sales tax in the states you have nexus. You’ll also need to report and file taxes according to that state’s tax laws.

What factors determine sales tax nexus?

In other words: How do you know if you have nexus within a state? There are multiple considerations you need to be aware of.

Location-based nexus

Your business will have nexus everywhere you have a business presence, even if the presence is only temporary (such as an expo or trade show).

This can include the location of your:

Home or office
Brick-and-mortar stores
Sales showrooms or sample rooms
Headquarters or satellite offices
Repair shops or places your products are altered
Manufacturing or production facility
Warehouse or inventory storage (such as a 3PL fulfillment center)
Employees, contractors, installers, or traveling sales representatives
Affiliates
Drop-shipping relationships or third-party distribution
Events or trade shows you sell at

If you sell on Amazon via their FBA services, your business has nexus within every state where Amazon is storing your inventory.

Your business is required to collect sales tax from buyers whenever the products solds are being shipped to a state in which you have nexus.

Here’s an example of location-based nexus:

Let’s say your business is operating in Florida. Your office is in Florida. Your products are stored in a warehouse in Florida. You do not have a temporary or permanent business presence in any other state. You do not have employees or affiliates outside of Florida.

In this case, every time you sell products that are shipped within the state of Florida, you are required to collect sales tax. If you sell and ship to customers outside of Florida, you do not need to collect sales tax in those states.

But as your Florida-based business grows, you decide to hire a third-party fulfillment company to store, manage, and ship your inventory. The 3PL fulfillment company stores your products in Florida, California, and New Jersey.

Now, you’ll need to collect sales tax on purchases in Florida, California, and New Jersey.

However, there’s more to nexus now than just location…

Economic nexus

Economic nexus is a newer concept, largely inspired by the current landscape of e-commerce. This will apply when your business has a significant economic presence within a state, the thresholds for which are based on state rules.

With economic nexus, if you sell above a certain amount of revenue or transactions within a state, then you are required to collect sales tax from customers in that state.

As of now, about half of the states that impose sales tax have requirements based on whether your business exceeds a specific threshold of sales. More states will be following suit and will begin to pass updated economic nexus laws.

Currently, the most common thresholds are:

If you sell over $100,000 in annual revenue within a state; or
If you sell over 200 transactions within a state.

Again, sales taxes laws and rules vary state by state. (We can’t stress this enough!)

A bit of a history lesson…

Setting the precedent for economic nexus: South Dakota v. Wayfair

To fully grasp economic nexus, it’s important to understand its basis and origins. Let’s review some of the historical context and precedents of recent tax laws.

As we mentioned in the beginning of this guide, the U.S. Supreme Court made a ruling on June 21, 2018 which directly impacted the sales tax nexus requirements for businesses that sell to U.S. customers. This landmark case is known as South Dakota v. Wayfair, and it has significantly changed the landscape of e-commerce as it relates to taxation.

Prior to the ruling, online sellers were only required to collect sales tax from buyers in states where the business had a physical presence (known as location-based sales tax nexus).

This previous standard was upheld in the 1992 case of Quill Corp v. North Dakota, in which the United States Supreme Court ruled that a business must have a physical presence in a state for that state to require the business to collect sales taxes.

Amazon.com used the Quill Corp v. North Dakota ruling to justify their practice of not charging sales tax on their online sales. This gave Amazon a huge competitive advantage over competing retailers – especially brick-and-mortar shops – from 1995 until 2012. At that time, pressure from some states made Amazon decide to collect sales tax in certain locations.

With the rise of eCommerce, online sellers were largely able to escape taxation. While it was beneficial to many sellers, this was at the detriment of brick-and-mortar stores who were unable to avoid sales taxes. And, ultimately, it was at the detriment of state and local treasuries, which saw losses in sales tax revenue.

As mentioned earlier, sales taxes are generally used to help fund public budget items such as education, public safety, roads, and emergency services. As ecommerce gained market share, you can understand why this was unavoidably burdensome to states.

Then in 2016, South Dakota enacted a law which required online sellers to collect and remit sales tax if they either:

Made more than $100,000 in gross sales in the state of South Dakota within the calendar year; or
Made more than 200 individual sales transactions in the state within the calendar year.

When large retailers failed to comply, South Dakota decided to set a precedent by suing them. Parties the state targeted in their lawsuits included Wayfair, Newegg, and Overstock. South Dakota’s argument was, in part, that technological advancements in data collection – such as the ability for retailers to tailor online marketing based on consumers’ IP addresses – have made it easier to determine, collect, and report appropriate sales taxes.

On June 21, 2018, the U.S. Supreme Court ruled 5-4 in favor of South Dakota, agreeing that the decision in the previous Quill case was incorrect based on the current state of technology. The Quill case was overturned, and the South Dakota v. Wayfair case has set the new precedent.

As you can imagine, taxation laws will continue to evolve based on the ever-changing landscape of business and e-commerce.

How do I know if I have nexus in a state?

To determine which states you have nexus in, there are some simple questions you must ask yourself.

Start by answering the following questions to determine where your business has location-based nexus:

In which states does my business have a physical presence in? (Such as an office, brick-and-mortar store, repair shop, warehouse, or showroom.)
In which states does my business have employees? (Including contractors, installers, sales representatives, and other personnel.)
In which states does my business have products stored and shipped from? (Such as a warehouse or 3PL fulfillment center.)
Does my business have drop-shipping relationships in any state?
Does my business have affiliates in any state?
Does my business cross state lines to sell products? (Such as at events or trade shows.)

To determine where your business has location-based nexus, ask yourself:

Does my business exceed the economic nexus threshold in any states? (This threshold varies but is commonly over $100,000 in annual revenue within a state or 200 transactions within a state.)

Ultimately, you’ll need to consult a tax professional to ensure that you’ve considered all factors and prepared accordingly.

Now, we’ll answer the most important question on your mind…

How can I ensure my business is sales tax compliant?

We’re glad you asked! If you’re tempted to disregard the updated tax laws and continue with business as usual, we urge you to reconsider. States are now free to pursue sales tax from all online retailers who exceed that state’s thresholds of revenue or transactions as stated in their economic nexus laws.

Fortunately, compliance is becoming easier with new technology and software that can automatically determine which states your business has exceeded the thresholds in, helping your business comply without much added friction.

There are multiple steps to ensuring your business is sales tax compliant:

You must determine where your business has sales tax nexus.
You must confirm whether some or all of your products are subject to sales tax.
You must legally comply by registering for a sales tax permit in your nexus states.
You must confirm whether other fees such as shipping and gift wrapping are subject to sales tax in your nexus states.
You must collect sales tax from buyers in those nexus states. (Note: You’ll want to ensure this is properly set up and automated within your ecommerce sales channels, marketplaces, or online shopping carts.)
You must report the sales tax you have collected, file your sales tax returns, and make the required payments.

Please note: If you have nexus based on one sales channel (such as Amazon FBA), then that nexus state applies to your entire business – regardless of how many sales channels you have.

Are my products taxable?

While the rules vary by state, most tangible products are taxable in the U.S. if they are not considered necessities. This can include anything from kitchenware to purses to car parts to jewelry to novelty items to luxury clothing.

Most states do not charge sales tax on items that are considered necessities such as groceries, clothing, prescription drugs, textbooks, or supplements; however, this is not a complete list and rules do vary between states.

Origin-based vs. destination-based sales tax collection

Generally, states will require you to collect sales tax based on either origin or destination. This is also known as sales tax sourcing.

If your company is based in a state with origin-based sales tax sourcing, then you’ll need to collect sales tax in the state your business is located in. This means you would charge sales tax at the rate required by the state your business has a presence in (i.e. where your home, store, office, headquarters, or warehouse is located).

Most states use destination-based sales tax collection. If your company is based in a state with destination-based sales tax sourcing, then you’ll need to charge the sales tax at the rate required by the state your buyer’s “ship to” address is located. This gets more complicated because you’ll need to charge the rates required by the state, county, city, and applicable local sales tax rates based on your buyer’s shipping address.

Note: For e-commerce businesses, you’ll generally be collecting sales tax based on rates required for the “ship to” address.

Is shipping taxable?

Some states consider shipping fees to be a taxable component of the transaction, especially in e-commerce. In those states, you would be required to collect sales tax on the shipping fee charged to your customer. This means if a customer’s shopping cart total is $50 and they select a $15 shipping option, the taxable amount would be $65.

Some states do not consider shipping to be a taxable charge. In that case, the customer would only be taxed on their $50 shopping cart total.

Either way, you should be able to view and/or manage these settings in your online marketplace or shopping cart.

Is gift wrapping taxable?

State rules vary, but some states do consider gift-wrapping to be a taxable charge. You should be able to view and/or manage these settings in your online marketplace or shopping cart.

How do I register for a sales tax permit?

Once you’ve determined that (1) your business has sales tax nexus in a state and (2) your products are taxable according to that state, then you’ll need to legally collect sales tax on sales to buyers in that state. To do this, you’ll need to register for a state sales tax permit. This is commonly handled by the State Department of Revenue for that state.

Note: It is unlawful to collect sales tax from buyers if you do not have a valid sales tax permit in that state, and it can be considered tax fraud to do so. Make sure you have the permits required by law.

Most states make it relatively easy to file online, which you can do yourself if you feel capable. Alternatively, you can hire a tax professional to register for your sales tax permits.

When you receive your sales tax permit from the state, they will inform you of the frequency and due dates of your sales tax filings. This may be annually, quarterly, or even monthly.

Note: If you have nexus in multiple states, you may have different filing dates for each state. If this is creating undue burden for your business, you may be able to contact your nexus states’ sales tax department and ask for permission to file less frequently.

When it’s time to submit your sales tax filing…

Most states require you to report a breakdown of how much sales tax you collected by state as well as within each county, city, and applicable taxing district. This allows the state to allocate those tax-generated funds to the appropriate jurisdiction.
Always file early! Funds may take a few days to clear, which could result in late fines if they don’t clear by the deadline.
Keep in mind: This can be a time-consuming process depending on your sales volume, sales channels, and how many nexus states your business has.
File a sales tax return by the deadline every time, even if you didn’t collect any sales tax within that taxable period.
Some states offer sales tax discounts. Make sure to double check if this applies to you!

How do I set up sales tax collection in nexus states?

You should be able to view and/or manage these settings in your online marketplace or shopping cart. Most marketplaces and online shopping carts will have a built-in ability for you to set up automated sales tax collection from buyers in the states you have nexus, and you should be able to edit those settings.

Note: Do not expect the tax settings to be set-up for you automatically by your online shopping cart or the online marketplace you sell on. You will likely need to set up the correct rates manually.

Remember: If you have sales tax nexus in a state, you first need to register for your state sales tax permit. At that point, you are required to collect sales tax from all buyers in that state on all of your company’s sales channels.

Here’s an example:

Let’s say you have offices in Florida and Tennessee, and you have a small warehouse in Florida. Whenever customers purchase from your website, you ship those orders from your Florida warehouse.

You also utilize Amazon’s FBA service, and Amazon is storing your inventory at their warehouses in California, New Jersey, and Kentucky. Whenever customers purchase your products on Amazon, those orders are shipped from Amazon’s warehouses.

In this case, you’ll need to collect sales tax from buyers in all five of your nexus states (Florida, Tennessee, California, New Jersey, and Kentucky) – regardless of which sales channel the order originates from.

How does this impact a drop-shipping business?

Collecting sales tax gets even more complicated with the dropshipping business model.

Here’s an example:

Let’s say your business sells graphic-printed tote bags, which are printed and shipped on demand by a third-party company.

This dropshipping scenario requires three main components:

Your customer purchases the product from you.
You purchase the product from your vendor.
The vendor ships the product to your buyer.

So the tax rules for this transaction will be based on where you, your customer, and your vendor are located and have sales tax nexus:

If you have nexus in your customer’s state, you’re required to charge sales tax to your customer.
If your vendor has nexus in your state, they’re required to charge you sales tax when you purchase from them. *Unless you give them a resale certificate showing that the item you purchased from them is for resale to your customer.*

Is my business at a disadvantage compared to my competitors?

Probably not, but it depends on a lot of factors.

If your competitor has higher sales volumes than you and/or your competitor has a presence in more states than you do, then they likely also have nexus in more states than you. In that case, they will likely need to charge sales tax to more customers than you are required to. If that’s true, customers may be able to avoid paying sales tax by purchasing from your business instead of from your competitor. You may be able to use this as a marketing advantage in some states.

Summary & Quick Tax Tips

Are you the type of person who scrolls to the bottom of the page for a summary? We understand, and we’ve got your back!

Below we’ve listed the absolute basics you need to know about sales tax nexus…

Key takeaways about sales tax nexus:

Nexus is based on your business having either a physical connection or significant economic connection to a state.
You are required to collect sales tax from buyers whenever you ship a taxable item to a nexus state.
Nexus in any sales channel will apply to your entire business. You are required to collect sales tax from all buyers in your nexus states regardless of which sales channel the order originates from.
Sales taxes are governed at the state level, and they vary according to each state’s sales tax laws and rules.
Once you’ve determined that (1) your business has sales tax nexus in a state and (2) your products are taxable according to that state, then you’ll need to legally collect sales tax on sales to buyers in that state.
Be sure to register for a sales tax permit before you begin collecting sales tax from buyers. It is unlawful to collect sales tax from buyers if you do not have a valid sales tax permit in that state.
For e-commerce businesses, you’ll generally be collecting sales tax based on rates required for the “ship to” address.
You will likely need to set up the correct rates manually. Do not expect the tax settings to be set-up for you automatically by your online shopping cart or the online marketplaces you sell on.
Shipping charges and gift wrapping charges are considered taxable in some states. Be sure to set this up when you’re setting up sales tax collection rules in your online marketplace or shopping cart.
If you have nexus in multiple states, you may have different sales tax filing dates for each state.
Most states require you to report how much sales tax you collected by state as well as within each county, city, and applicable taxing district.
Always file early! Funds may take a few days to clear, which could result in late fines if they don’t clear by the deadline.
This can be a very time-consuming process depending on your sales volume, sales channels, and how many nexus states your business has.
File a sales tax return by the deadline every time, even if you didn’t collect any sales tax within that taxable period.
Some states offer sales tax discounts. Make sure to double check if this applies to you!
Dropshipping businesses face more complicated sales tax rules based on three parties: your business, your customer, and the vendor you dropship with. Speak to your drop-shipping vendor(s) to understand who will be responsible for collecting sales tax.
The Federation of Tax Authorities (FTA) lists all state revenue departments and state taxing authorities on their website.
For information on your company’s unique tax needs, speak with a certified CPA or tax professional.