Most online businesses already have to collect sales tax on some transactions. If your business has a physical presence in a state with sales tax—even if it’s just your home office—you’re required to collect sales tax from residents of that state.
But Congress may soon expand that by allowing any state to require online businesses to collect sales tax, no matter where the business is located. In fact, three bills to that effect were introduced in the last session of Congress, and a new one is expected to be introduced early this year. We can’t know exactly what the new bill will include, but we can make reasonable guesses based on the three previous bills.
So if you have an online business, what will online sales tax collection mean for you?
Will you have to collect sales tax?
All three previous bills exempted some businesses from collecting sales tax, and the new one is likely to do the same. You will probably only have to collect sales tax if all of the following statements are true for you:
- You sell to residents of a state with sales tax
- That state has simplified its sales tax laws as the bill requires
- That state has chosen to require out-of-state retailers to collect sales tax
- You do not qualify for the small seller exemption. We don’t yet know how “small seller” will be defined in the new legislation, but the most popular previous bill exempted sellers with less than $500,000 in annual remote sales.
If even one of these statements is not true, you most likely won’t have to collect sales tax.
When will you have to start collecting?
Like the previous bills, the new bill will have a timeline describing when states may receive collection authority—that is, the authority to require out-of-state retailers to collect sales tax. Once a state has collection authority, it can require a retailer in any other state to collect sales tax.
But for most online retailers, the timeline won’t really matter. A customer could be from any state, and if that state has already received collection authority, you’ll have to collect sales tax from the customer.
In other words, you’ll need to be ready to collect sales tax as soon as the first state receives collection authority. You never know where your next customer could be located.
So when will the first state receive collection authority? While we can’t know for certain, it’s reasonable to expect the new bill’s timeline to be similar to those in previous bills.
First, keep in mind that, like every previous bill, the new bill will almost certainly say that a state’s sales tax laws must be simplified before it can receive collection authority. The twenty-four states that are currently members of the Streamlined Sales and Use Tax Agreement (SSUTA) have already simplified their sales tax laws, so they will be the first to receive collection authority.
SSUTA states may be able to require you to collect sales tax on the first day of the calendar quarter at least 90 days after the legislation passes. Which means that you’ll need to be ready to collect sales tax three months after the bill becomes law.
Non-SSUTA states may be able to receive collection authority on the first day of the calendar quarter six months after they simplify their sales tax laws. Note that for non-SSUTA states, the collection authority date is based on when the state simplifies its sales tax laws, not on when the bill becomes law. But again, you’ll need to be ready to collect sales tax on the first collection authority date, likely only 90 days after the bill passes.
The previous bills required states to notify retailers in advance about when they’ll need to start collecting, and new legislation is expected to do the same.
What’s involved in collecting sales tax?
Collecting sales tax is essentially composed of three tasks: calculation, collection, and remittance.
First, you need to calculate the sales tax due for your customer’s location. This means using the state and local tax rates for the customer’s home address and not including tax-exempt items as your customer’s tax jurisdiction requires.
Next, you need to collect the sales tax due. This also includes tracking how much sales tax you collect from each customer on each purchase, so that you can remit the correct amount of sales tax to each state.
Finally, you need to remit the sales tax you’ve collected to the appropriate states through a monthly sales tax return. Keep in mind that if you’ve registered to collect sales tax in a particular state, you must submit a monthly sales tax return for that state, whether or not you’re remitting any sales tax that month.
Fortunately, there are ways to automate each of these steps, including tools that your shopping cart provider may offer and services that handle everything for you. In the next post in this series, we’ll look at the different methods available to make online sales tax collection easy for retailers.
About the Author
Erin Granville is Communications Editor at FedTax, the proud creator of TaxCloud.
TaxCloud is a free, easy-to-use sales tax management service for retailers. It handles every aspect of sales tax, from calculation to collection to filing—all at no cost for retailers.
TaxCloud can be easily integrated into most accounting, order management, and shopping cart systems. It has been evaluated by states and an independent review board and has been designated one of only six Certified Service Providers in the nation.