Understanding Sales Tax Compliance for E-commerce

Sales tax. For many e-commerce sellers, it's one of the most confusing and intimidating aspects of running a business. The rules are complex, vary by state, and are constantly changing. However, ignoring sales tax is not an option and can lead to significant penalties.

What is Sales Tax Nexus?

The key concept you need to understand is "nexus." Nexus is a legal term that means a business has a connection to a state that is significant enough for that state to require the business to collect and remit sales tax. You can establish nexus in two main ways:

• Physical Nexus: This is the traditional form of nexus. It's created by having a physical presence in a state, such as an office, warehouse, or employees. For Amazon FBA sellers, storing inventory in an Amazon fulfillment center creates physical nexus.
• Economic Nexus: Following the 2018 Supreme Court case South Dakota v. Wayfair, states can now require businesses to collect sales tax based on their economic activity alone. This is usually triggered by exceeding a certain amount of sales revenue or a certain number of transactions in a state within a year (e.g., $100,000 in sales or 200 transactions).

Your Responsibility as a Seller

Once you determine you have nexus in a state, you are legally required to:

1. Register for a sales tax permit in that state.
2. Collect sales tax from customers in that state.
3. File sales tax returns (usually monthly, quarterly, or annually).
4. Remit the collected sales tax to the state.

For Amazon sellers, Amazon's Marketplace Facilitator laws mean that Amazon will collect and remit sales tax on your behalf in most states. However, you are still responsible for registering for permits and filing returns where you have nexus.

How to Stay Compliant

Navigating the thousands of tax jurisdictions in the US is nearly impossible to do manually. The best approach is to use an automated service.

• Nexus Analysis: Use a service to track your sales in real-time and alert you when you are approaching economic nexus thresholds in new states.
• Automated Registration and Filing: Let professionals handle the permit registration and the recurring task of filing returns in every state where you have an obligation.