If you sell something online, you probably have to think about sales tax. And, with a new Supreme Court decision overturning the landmark Quill decision, you will probably now have to think about it in a different way.
In 1992, the Supreme Court decided in North Dakota vs. Quill that a state could only force a company to collect sales tax if that company had a physical presence — a building, for example — in the state. Now, nearly 10% of U.S. commerce takes place online, and the Government Accountability Office reckons that states lose out on somewhere between eight and thirteen billion dollars each year in taxes that they could be collecting.
Understand, consumers still owe tax on things they buy online. Businesses, too. It’s called use tax, and it usually pairs up with sales tax. Shoppers are supposed to calculate the amount of sales tax they would have paid if they had shopped locally, and pay it to the state along with their income tax return.
An estimated 1% of consumers actually do this. Naturally, states want to make ecommerce companies collect the sales tax they can’t get consumers to pay directly.
In a new Supreme Court case, South Dakota vs. Wayfair, the justices overturned Quill and said that states can now make laws requiring online sellers to collect sales tax. 21 states have already passed laws doing just that.
So, if you’ve been collecting sales tax in your own state, do you now have to collect it in other states as well?
Are your goods and services taxable?
Different things are taxable in different states. Some states collect sales tax on food and others don’t. Sales tax on clothing can be very complicated, with tax being collected on some items and not on others. In Pennsylvania, blankets in general are taxed but baby blankets are not. This list could go on for a long time, and you would be amazed by some of the contradictions. Services are even more complicated. In Connecticut, web design services are taxed, in New York they’re not, and in Colorado they are — but only if you get a physical object such as a zip drive or a printout of a mock up.
Long and short of it, you can’t just figure that South Dakota charges 4.5% sales tax, plug that into your ecommerce cart, and relax. You have to find out, for each state where you have sales, what rules and rates apply to your particular goods and services.
Do you have nexus?
Nexus, which means connection, used to mean that you had a physical presence in a state. If you sold vitamins in Maine and had never set foot (or paid someone with feet) in Maine, you wouldn’t have to collect sales tax in Maine. This is where people get the idea that online shopping is sales tax free.
Now, you might have “economic nexus” in a state. Current laws define economic nexus as having sales of as little as $10,000 a year in a number of states. Other states have set their thresholds as high as $1,000,000. Each state gets to make its own rules about what counts as nexus. If you sell a couple of thousand dollars in each state every year, you probably don’t have nexus in any state but your own.
Just make sure.
What tax rate applies to your goods and services?
For every state where your stuff is taxable and you have nexus, you have to find out the rate for sales tax on each of the things you sell. In some states, this depends on where your company is located, and in others it depends where your customer is located. These two options are called origin and destination, and each state chooses which approach it takes.
There are roughly 12,000 different tax jurisdictions in the U.S., and each one can have different rules. In the state where our business is located, there are county and city taxes as well as state taxes, and calculations are destination-based. E-books are taxed at the full sales tax rate. If we sell a digital download to someone in Fayetteville, we must charge 9.75%. If we sell to someone in Bentonville, it’s 9.5%.
Bear in mind that it is illegal to collect sales tax without registering with the state first. Some states also require business licenses from anyone who will be collecting sales tax. So you must identify the states where you have nexus and register with them before you begin collecting sales tax.
Can’t WooCommerce just take care of this for you?
That would be nice, but no. WooCommerce has no setting called “Collect appropriate sales tax in all jurisdictions.”
When we work with clients who sell things, we ask them to check with their CPA or tax attorney and let us know what they want done in the way of taxes. In general, WordPress shopping carts work as you can see in the screenshot below. You set up tax classes for all the states in which you have nexus and enter the tax rate. If your goods and services are taxed at multiple rates in any state, you make additional classes and define them. So, if you sell blankets in Pennsylvania, you might need to have both the regular tax rate for regular blankets and the zero tax rate for receiving blankets. City and County taxes aren’t included in the settings, so you’ll have to create special tax classes for them, too.
Sounds like a jolly afternoon, right?
Once you have your cart set up, however, it should collect sales tax for you and also keep track of it so you can file and remit those taxes when required to do so.
If it turns out that you don’t have nexus in a state where you registered and collected taxes, you can still file. Alternatively, you could return the money you collected to the individual customers who paid it. You are not allowed to keep it.
There will be changes, we’re sure. Several states with new laws are already going to court, and many states have not yet made their new laws. It makes sense to start now and keep up with those changes as they happen.