Internet sales tax: What e-commerce small businesses should know

Sales tax is a tricky topic for e-commerce stores. Each state has its own sales tax rates, rules, and regulations businesses have to understand. Additionally, localities may charge their own sales taxes on top of the state rates. Understanding how sales tax works in the current climate can help your business stay compliant.

How internet sales tax used to work

The Supreme Court had ruled in the early 1990s that a business had to have a physical presence in a state to be forced to collect sales tax in that state. Instead, buyers were supposed to fill out "use" tax returns and pay the applicable taxes themselves.

Most people have never heard of use tax, so the tax mostly went uncollected. Instead, most sellers only collected sales tax in states where they had a physical presence.

The Supreme Court changes the rules

E-commerce has changed drastically since the 1990s, and the Supreme Court changed its opinion. Internet sales tax requirements changed in 2018 after the Supreme Court issued a ruling in South Dakota v. Wayfair Inc. The Supreme Court declared states could collect sales taxes on internet sales from out-of-state sellers in certain circumstances.

This case dealt with a South Dakota rule which requires sellers with more than 200 orders or over $100,000 of sales in the state to collect sales tax. This means small businesses with just a few sales to the state aren't required to collect and remit sales tax.

Other states follow suit

Other states acknowledged this ruling and set up their own internet sales tax laws shortly thereafter. Today, most states have internet sales tax laws that require certain sellers from other states to collect and remit sales tax on items shipped to the state.

Unfortunately, each state's law has its own requirements. This makes keeping track of which states you need to collect and remit sales tax extremely challenging.

Some states only have a sales dollar amount threshold, which usually starts around $100,000 or higher. Others apply a sales dollar threshold or a total number of sales threshold, whichever comes first. In these cases, the number of sales usually starts at around 200 transactions. In rare cases, states may not require you to collect sales tax until you reach both a sales dollar threshold and a total number of sales threshold.

These higher thresholds usually exempt smaller sellers from being forced to collect and remit sales tax on an inconsequential number or dollar volume of transactions. Here are some examples of how each state's laws may differ.

• Alabama. Must collect sales tax if your sales to the state exceed $250,000
• Florida. Starting July 1, 2021, you must collect sales tax if sales to the state exceed $100,000
• New York. Must collect sales tax if your sales to the state exceed $500,000 and 100 transactions
• Virginia. Must collect sales tax if your sales to the state exceed $100,000 or 200 transactions

Other considerations

You need to keep track of more than just sales thresholds for each state. Some states charge income tax on retail sales of goods only. Others may tax both goods and certain services. You need to keep up with what is taxed, what the tax threshold is, and any changes to these laws for each state you make sales to.

Thankfully, some e-commerce platforms have simplified the sales tax collection and remittance process for you. These platforms may collect and remit sales tax on all U.S.-bound orders based on the laws of each state. Alternatively, businesses can use a sales tax tool to integrate into their existing e-commerce platform to assist with the sales tax processes and rules across multiple states.