How You Can Prepare to Collect Online Sales Tax

taxcloud online sales tax serviceCalifornia is the most recent state to require online retailers with in-state affiliates, from Amazon on down, to charge sales tax. But, soon, many online retailers in every state may have to collect sales tax if, as anticipated, federal legislation known as the Marketplace Fairness Act, passes the House and Senate. If you run an online store, it’s time to think about how changing sales tax laws may affect your business, says R. David L. Campbell, CEO and co-founder of FedTax, creators of TaxCloud. TaxCloud, free to merchants, enables ecommerce retailers to calculate and remit sales taxes across the U.S.

Campbell suggests retailers begin preparing to collect online sales tax by asking themselves the following questions.

1. Does my shop gross more than $500,000 per year in sales outside of my home state?

The Marketplace Fairness Act exempts small sellers from collecting sales tax. You will not have to collect sales tax if you have less than $500,000 in remote sales in the preceding calendar year. However, until the bill passes, state laws may require you to collect sales tax if you have an in-state affiliate no matter what your annual sales, so remember to consider question number two, as well.

2. In which states do I have affiliates and/or customers?

Some states require online retailers to collect sales tax if they have an affiliate in the state. If you have affiliates, find out where they are located and if their states have this rule. Once federal legislation passes, affiliate sales tax laws will no longer apply, so you’ll only need to think about where your customers are located. Because online sales tax is based on the location of the purchaser, not the seller, you’ll need to collect sales tax for the states where your customers are located. Identify the states you sell to and visit their websites to find out their rules for online retailers. Be sure to find out what sales tax rates apply in which cities.

3. Are the items I sell taxable in a particular state?

Every state exempts certain kinds of goods from sales tax. Look up the taxability of the items you sell in each state you sell them. An item that’s taxable in one state may not be taxable in another.

4. Is a sales tax management service right for me?

In some cases, it may be easier, faster and cheaper to use a sales tax management service to calculate, collect and remit sales tax. Sales tax management services are available at every price point, and some are available free of charge. TaxCloud is free to merchants and can be integrated into virtually any accounting or ecommerce shopping cart system. If you use a shopping cart in your online store, the provider may already offer a sales tax management option. If you decide to go with a service, make sure you find one that’s been tested and certified by state Departments of Revenue. FedTax has been designated a Certified Service Provider (CSP) by the Streamlined Sales Tax Governing Board. CSPs have certain agreements and privileges with states that help protect you because they get their rate and taxability data directly from states, which both ensures accuracy and protects you from liability in the event of an error.

Upcoming changes to online sales tax collection can be daunting, Campbell admits. But with the answers to the above questions in hand, you’ll be better prepared for the changes that take place.