How To File Ecommerce Sales Tax Correctly

What Is Ecommerce Sales Tax?

Ecommerce businesses are required to pay sales tax to the states where they sell or ship products. Each state has its own set of sales tax rules and regulations, which can vary significantly. As an ecommerce operator, it is essential to stay informed about these sales tax requirements on a state-by-state basis. Keeping up with the rules will help you avoid costly fines and penalties.

In this article, we’ll cover how sales tax works, when you need to start filing, and how to stay compliant and avoid severe penalties for your business.

How Does Ecommerce Sales Tax Work?

Your business is responsible for charging, collecting, and remitting sales tax payments to the appropriate state government on a monthly, quarterly, or annual basis, depending on state regulations.

Collecting sales tax is straightforward–most ecommerce platforms offer a simple toggle to enable sales tax collection. However, the importance of accurate filing and timely remittance cannot be overstated. Read on to learn everything you need to know about when and how to file correctly.

When Do I Need To Start Filing?

Once your brand reaches “nexus”—a sales threshold, usually denominated in dollars, units sold, or transactions—in a given state, you must start filing your sales tax with their government (monthly, quarterly, or annually—based on their rules). Each state has its own nexus threshold. The most common threshold is $100,000 of annual sales and/or 200 transactions.

Do not rely on this metric as a formal guideline. Research each state’s nexus rules to ensure you comply with local sales tax laws.

Once you reach nexus in a given state, register for a sales tax permit. This lets the state know you’re selling in their area, and that they can expect sales tax filings from you moving forward. This is important, because it helps avoid fines, back taxes, and other harsher penalties down the road.

How Do I File Ecommerce Sales Tax?

Each state has its own portal through which you must file your sales tax. Your job as an ecommerce operator is to:

1. Monitor each state for nexus status

2. Register with each state you’ve reached nexus in

3. Collect sales tax in each of those states

4. File monthly, quarterly, or annually via each state’s portal

Alternatively, for busy business owners juggling multiple responsibilities, services like Numeral can streamline your sales tax management. They monitor your nexus status, handle registrations in the appropriate states, and ensure your sales tax is filed accurately and on time—giving you peace of mind to focus on growing your business.

How Are Ecommerce Sales Tax Rules Broken?

Despite the clear documentation of sales tax rules and regulations, many ecommerce stores inadvertently violate these guidelines, which can lead to potential liabilities.

Some common ways businesses break sales tax rules:

1. Failing to Register Once Reaching Nexus: Many businesses overlook the requirement to register in states where they have established a sales tax nexus.

2. Not Collecting Sales Tax Post-Registration: After registering, some businesses forget to start collecting the appropriate sales tax from customers.

3. Applying Incorrect Sales Tax Rates: Miscalculating or using the wrong sales tax rate can lead to compliance issues and unexpected liabilities.

4. Delaying Filings or Missing Deadlines: Failing to file sales tax returns on time can result in penalties and interest.

5. Neglecting to Remit Payments: Some businesses may overlook their obligation to remit collected sales tax to the appropriate states, leading to repercussions.

What Are The Penalties For Non-Compliance?

Some states fine you up to $50 for a missed filing. But in reality, that’s the lightest of penalties—they get far worse from there.

First warning: You will likely receive a letter warning you of impending penalties after missing a sales tax filing. Note: these warnings are often sent via physical mail—not email. Check your mail regularly at your business’s physical address to ensure you don’t miss critical mail such as this.

Back taxes: States will require you to pay any outstanding taxes, regardless of how long they have been overdue. Additionally, the penalties and interest for late payments can be substantial, adding to your financial burden.

Interest On Unpaid Taxes: Depending on the severity of non-payment, states may charge interest on back taxes owed. In ecommerce, where profit margins are often slim, this is a situation you want to avoid.

Personal Fines & Jail Time: The principal(s) of an ecommerce business can be held personally liable for sales tax obligations. If you neglect to file accurately, miss payments, or commit other sales tax violations, you could face serious personal penalties, including fines and even the risk of jail time.

Note, these consequences are typically reserved for the most serious violations. If you follow the regulations as intended, you generally won’t need to worry about this.

Now that you understand the importance of filing sales tax, you might wonder: how will the state know you even owe them in the first place?

How Will The State Know I Owe Sales Tax?

Simply put, the state won’t automatically know you owe sales tax. They discover this through audits of your business. The catch? You won’t be notified in advance when an audit occurs, making it crucial to file correctly and comply with regulations at all times.

If you realize you haven’t been fully compliant, but haven’t been audited yet, what should you do?

Should you wait for an audit and risk facing severe penalties? Absolutely not.

Should you start filing and hope the state doesn’t notice? Definitely not.

The best course of action to minimize penalties, and potentially negate them altogether, is by filing a Voluntary Disclosure Agreement (VDA).

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What Is A Voluntary Disclosure Agreement (VDA)?

A Voluntary Disclosure Agreement is a program that allows businesses to come forward and resolve outstanding tax liabilities with the state. It provides an opportunity for brands that owe taxes but haven’t filed to request a way to “make things right.” You can think of this as your chance to proactively address any tax issues with the state.

Some key facts about VDAs:

Anonymity: VDAs can be submitted anonymously via the state’s sales tax portal. You will provide relevant information about your business and any past filing issues. Once the state confirms your eligibility for a VDA, you will then identify yourself and work through the next steps.

Reduced Penalties: If eligible, the state often waives penalties associated with prior misfilings.

Limit Lookback Scope: The state typically limits the period of time they look back to when assessing back taxes owed. This is a good faith effort on their part, contingent on your commitment to file correctly in the future.

Note: Your brand can only qualify for a VDA if they have never filed sales tax before. Companies registered with the state who’ve filed in the past but stopped filing or misfiled, are not eligible and are liable for standard penalties.

Frequently Asked Questions

How do I know when I need to file sales tax with a state?

You must file sales tax with a state once you establish nexus, typically defined by either  $100,000 in annual sales or 200 transactions in that state. Be sure to check nexus requirements for each state.

How do I ensure I’m collecting sales tax?

Most ecommerce platforms make it easy to enable sales tax collection. For example, here’s a comprehensive guide on how to set it up for Shopify.

What are the penalties for not filing properly?

Penalties can vary widely, ranging from small fines for missed filings to significant fines,  interest on unpaid taxes, and potential criminal charges for company founders in severe cases.

How will a state find out we owe them sales tax?

While states can’t monitor every business, they can discover unpaid sales tax through audits. It’s crucial to maintain sales tax compliance to avoid raising red flags during future audits.

How do I file sales tax correctly for my company?

Monitor sales in each state for nexus status, then register as required. Next, enable sales tax collection through your ecommerce provider. Finally, file your sales tax returns—monthly, quarterly, or annually—via each state’s tax portal.

Services like Numeral make it easy to stay compliant with sales tax regulations across states, giving you peace of mind to focus on growing your business. You can learn more about Numeral here.