When speaking with eCommerce sellers, the single biggest question that comes up time and again is, “Do I need to collect sales tax?”
This question is quickly followed by, if so then where and when? These are great questions and they are being asked by everyone. They are asked by eCommerce sellers their CPAs and other tax professionals.
It doesn't matter if they are large or small; if they are selling through a marketplace like Amazon or eBay, or just selling on their own website. And the question is not only asked by those selling tangible products but also by those selling digital goods, software and even services. The answer is ‘maybe.’
How to Determine if Collection is Needed
Figuring out sales tax collection for your eCommerce clients depends on five core elements. These are:
1. Sourcing: Currently, a seller is generally not required to collect tax based on where they are physically located, but instead where the customer receives the product or in the case of digital goods and software it could be the billing address. So, if you live in California and your customer is in Pennsylvania and you ship a product to the customer in Pennsylvania, you are not responsible for collecting the California tax.
However, depending on the rest of the elements you may be responsible for collecting the Pennsylvania tax. For service providers, the benefit of the service will generally be where the customer is located, and the same concept applies.
2. Nexus: Nexus is the term that we use to mean link or connection. You must have some sort of link or connection with a state before a state can require you to collect its tax. Contrary to popular belief it is actually pretty easy to create nexus.
About Michael Fleming
Mike is the founder of Michael J Fleming & Associates dba Sales Tax and More. Prior to beginning this new venture, Mike spent the better part of a decade with Peisner Johnson, an accounting firm that is focused entirely on solving state and local tax issues.