*Legal disclaimer: Please note that nothing here is given as legal advice, and information may not be 100% accurate or even apply to you.
Charging sales tax on online sales is, unfortunately, not as simple as it might seem. The complexity comes down to the fact the every country/state/province/city/county all have different tax laws, and building+managing an eCommerce system that covers all of them really isn’t something that makes sense.
Brick-and-mortar stores have it easy.
Charging sales tax on a product from a brick-and-mortar shop is easy. The customer walks into your shop, and pays the local sales tax rate. Every sale has the same taxes applied to it – easy!
Online stores have it crazy
But charging sales tax online is the opposite of easy. The customer isn’t seen as “walking into your shop”. Rather, your shop is seen as “walking up to the customer”. That means, you have to charge the tax rate where the customer is. That winds up meaning that if you have customers in thousands of places, you also have to calculate thousands of tax rates.
Not only do you need to calculate thousands of tax rates, you also need to pay taxes to thousands of different government entities. It’s truly quite ridiculous, and why governments have decided to do it this way is beyond me. It could have been as simple as a brick-and-mortar shop, but it isn’t, and that’s really quite a burden on small online businesses. But I digress.
How this crazy system helps small businesses: Understanding “Nexus”
Despite its frustrating nature, one benefit of this crazy system for online sales tax is the idea of “Nexus”. Nexus means you lawfully owe taxes in a particular state/province. A small business with 0-199 sales does not have Nexus in every location on Earth.
For example, in the United States today (and this may change), you don’t have Nexus in a state until you’ve had $100,000 in total sales, or 200 transactions in that state. This is a recent law change in the US in 2018.
Therefore, you don’t need to charge, or pay, sales taxes in a US state unless you’ve hit those numbers, and again, hit those numbers in that state.
As a result, if you’re a small business, you may choose to set limits on the number of sales your store can have in a given state. This is one way you can be sure you don’t have Nexus in a state. Not all eCommerce systems will have this type of limiting built into them, so you may need to custom build that.
One way to make it easy, but it’s not cheap
Another option is to use a service like TaxJar, which takes away all of the complications of tax calculating, and even remitting, as they handle that for you. However, their pricing is quite expensive, especially for small start-ups.
One helpful thing that TaxJar has available for free is a tax rate calculator. So if you’re wondering what a tax rate is in a specific location, you can find it quickly using their tool here: https://www.taxjar.com/sales-tax-calculator/
TaxJar also has a system to help you know if you have Nexus in a given state, since the Nexus laws differ from state-to-state. You can find it here: https://www.taxjar.com/sales-and-transactions-checker/
- Choosing if/when you charge tax depends on your Nexus status in the customer’s location. No Nexus? No tax.
- Setting limits on sales-in-a-state could help you avoid having Nexus there.
- If you do have Nexus in the customer’s location, knowing how much tax to charge can be a lot of work to maintain/update, but there are tools which can help, like TaxJar.
- Nexus laws are different in all countries, so it’s smart to contact your local tax professional.
- If you have the money, using a service like TaxJar can greatly reduce the work required on your part to remain legal.