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What’s the best way to collect sales tax online?

Posted on January 30, 2013 by Erin Granville

If you have an online business, you already have to collect sales tax for at least one state—your home state—and you may soon have to collect sales tax in more states. So what’s the best way to handle online sales tax collection?

While you do have a few options, most of them—with one notable exception—require you to invest significant time and/or resources. Some e-commerce platforms offer sales tax calculators, but you’ll have to manually enter the sales tax rate for each state and local tax jurisdiction in a table and update them any time there’s a change. Or, if you have programming experience or the resources to hire someone who does, it’s possible to create your own program to calculate sales tax.

But the easiest option by far is to use a sales tax management service.

Sales tax management services automatically handle sales tax collection for you. All services calculate sales tax, but some can also create and file your sales tax returns, remit the sales tax collected to states, and manage exemption certificates. If the service has been certified by states, it may also offer indemnification—you won’t be held liable for any errors. Sales tax management services also automatically update any changes to sales tax rates.

These services vary in cost. Most frequently, they charge a software licensing fee as well as a fee for each time your store looks up a tax rate, though some services charge just the licensing fee or just the look-up fee. In addition, some charge for features such as sales tax return filing.

There is currently just one free service available, TaxCloud, which offers the features mentioned above—calculation, remittance, filing, exemption certificate management, indemnification, and automatic updating—at no cost to retailers. Instead, states pay a commission based on the amount of sales tax that TaxCloud helps retailers collect. (Full disclosure: I’m employed by FedTax, the company that created TaxCloud.)

If you’re a Spree Commerce merchant, there’s an extension that lets you integrate TaxCloud with your online store, or you can use Spree’s default tax calculator. Spree’s guide to taxation has more information about sales tax and the Value Added Tax (VAT) often used outside the US.

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.

Check out the Spree TaxCloud extension written by Spree Community member Jerrold Thompson to integrate TaxCloud with your Spree store.