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Do I need to collect sales tax for selling online in 2024?

Do I need to collect sales tax for selling online in 2024?

Online sales tax rules, tax registration thresholds, economic nexus laws – all of this gets pretty complex for an online business. So complex that it’s hard to answer the most basic question of all: “Do I need to charge sales tax or not?!”

We feel your pain.

By the end of this blog post, you’ll understand if you need to collect sales tax for selling online and how to automate this in your business.

Do I need to collect sales tax for selling online?

You must collect online sales tax in any place where you’re registered for sales tax, VAT, or GST.

So the question becomes: Do you need to register for sales tax?

But the answer to this question depends on several different factors!

  • What you’re selling – Are the products taxable?
  • Where you’re selling – What are this country’s laws about tax liability?
  • When your business registration is required – Have you passed the sales threshold?

Your tax liability will be triggered at different times depending on each of these factors, and it’s not always intuitive to you as the business owner.

For example: If you make your first sale in Spain, you should register for EU VAT right away. But if you make your first sale in California, you probably don’t need to register for sales tax until you sell $500,000 in that state alone.

Let’s go through and explain each of these factors one by one.

Are my products taxable?

If you sell physical products or “tangible personal property,” the answer is generally yes. Those products are taxed across the board.

The tax classifications become trickier if you’re selling digital products or services. “Digital products” can be quite an umbrella term that covers several different product categories. In addition to general guidelines for online tax for digital goods, we’ve also created specific guides per product category or tax type:

This is often a question we get from our customers so we take care to explain the different product tax codes within our compliance software tool. Then our database of international tax laws will always figure out the correct taxability of the product!

How do I know where I’m liable for sales tax, VAT, or GST?

You should monitor where your business is selling. As you grow, you’ll probably become liable for taxes in new places, and you need to stay on top of this to avoid those two missteps mentioned above. (Fines, fees, and lawyers, oh my!)

Each tax jurisdiction might have its own tax registration threshold, including separate ones for physical or digital products. This is also called an economic nexus in the US.

When your sales pass the tax threshold, you must register and start collecting taxes. Or the country/state/city might not have any threshold at all, which means you are liable for taxes from the very first sale.

Yes, we already touched on this with our first point, but it bears repeating! Here’s everything you need to know about tax registration thresholds and how they impact your business.

Other types of sales tax nexus in the US

In the US, the economic nexus is the one that most widely concerns (and sometimes confuses!) online businesses, but there are other forms of sales tax nexus that will trigger your sales tax liability in another state.

“Nexus” refers to a commercial connection in the state. Traditionally, it has meant “sufficient physical presence,” and there are multiple ways to satisfy this requirement – even if your presence isn’t quite physical! Sales tax nexus can be triggered by:

  • The house you live in, if you work from home
  • A brick-and-mortar office
  • A single sales representative or employee located in another state
  • A high-grossing affiliate business
  • Even using cookies on computers located in the area.

Each state will have its own particular nexus rules, so check out our Quick Guide to US Sales Tax Nexus.

Manually monitoring your sales in every place where you’re selling would be a _second _full-time job – and it would still leave room for error. That's why using an automation software is helpful. Here’s what our customer had to say:

When I only had nexus in my home state, it wasn’t that complicated. I’m expanding my business a lot and I’m starting to get way more transactions, so I thought I can’t keep doing this by hand. I’ll let the software tell me when I get nexus somewhere else. I feel more protected this way.

Jessa, online coach.

How to track sales and tax thresholds automatically

Quaderno does the “looking” for you! The app tracks all of your sales in real time, no matter where you’re selling, and measures those totals against each jurisdiction’s threshold rules.

What states don’t have sales tax?

There are five US states that don’t have a state-level sales tax:

  1. Alaska*
  2. Delaware
  3. Montana
  4. New Hampshire
  5. Oregon

*While Alaska doesn't have a statewide sales tax, some local jurisdictions within the state impose their own sales taxes! These are typically referred to as “local sales taxes” and could occur at the county, city, or other municipal levels. If you sell to customers in Alaska, then you should check with local authorities or tax agencies for more precise information.

Online Sales Tax When Selling Overseas

As an e-commerce business, you don’t have to charge your home tax to customers who are located abroad. So if you are located in California, you would not charge California sales tax to a customer in the UK. Similarly, a business in France would not charge you French VAT.

However… your business might become liable for UK VAT. And that French business might become liable for California sales tax! This is where tax compliance for ecommerce businesses gets tricky.

No matter where your business is based, you must check the VAT and GST rules of another country if you sell to customers who are located there. Because if you sell enough in that foreign country and you pass the tax registration thresholds that we mentioned above, then your business must register and start complying with that local tax system.

For example, overseas sellers to Australian customers don’t need to register for GST until their annual sales hit AUD$75,000. Before that threshold, you don’t need to worry about charging GST. Whereas in the EU, overseas sellers of digital goods are liable from the very first sale, so effectively from anything above €0.

If you’re curious about the online sales tax rules in particular countries, we’ve researched and compiled all the digital tax laws around the world into an easy-to-read blog post!

How do I know when to register for sales tax, VAT, or GST?

You must register for sales tax, VAT, or GST when your annual sales have surpassed a tax jurisdiction’s threshold or economic nexus.

When you’re growing quickly, you might be making sales in a brand new country every month, week, or day. While this is super exciting, it’s a lot to keep track of, logistically and legally, on top of everything else.

Even the most hands-on business owners might not be able to catch each new tax jurisdiction as it happens — or catch each registration threshold as it’s hit.

Tax compliance software should keep an eye on this for you and alert you when registration is necessary. That way you can focus on the parts of your business that you love, not this tedious stuff.

How to set up automatic tax alerts for sales tax, VAT, and GST

Thanks to Quaderno’s threshold reports and real-time data tracking, the system will alert you based on three different scenarios:

  • Your sales have hit 100% of the threshold (letting you know it might be go-time for tax compliance!)
  • Your business is liable for a new tax because you’ve made a sale in a new place, where there’s no registration threshold.

You’ll receive these notifications both in the app and via email. Who doesn’t love a heads up about important info? Especially when it can save you time, money, and stress.

How to meet online sales tax requirements

Once you know all your tax liabilities, then of course you must actually comply with the tax rules! This amounts to registering for taxes, collecting it on your sales, and filing tax returns.

1. Register for a sales tax permit, a VAT number, etc.

You must register for taxes before you ever start charging and collecting it from customers. It is illegal to start collecting any type of sales tax before your business is registered.

That said, registering for taxes looks a little bit different in each country. If you’re based in the US or have a nexus there, you must apply for a sales tax permit or seller’s permit. If you’re liable in the EU, you should apply for a VAT number.

Once you’ve applied, your business will receive a tax ID for that jurisdiction or country. And you’ll also be assigned a filing frequency, either monthly, quarterly or annually.

2. Collect sales tax

You must always calculate the correct amount of tax on each sale according to your product and your customer’s location, which determine the tax rate. Try using a free online sales tax calculator to check tax rates in different areas.

If you’re selling B2B in most countries around the world (read: not the US!), then you can likely use the reverse charge mechanism in your B2B transactions.

If you use a tax automation software, it can automatically calculate sales tax for you at the point of purchase.

3. File tax returns

Generally speaking, you must file a tax return in every place where your business is registered for sales tax, VAT, or GST. Even if you didn’t make any sales there during the reporting period, most jurisdictions still require you to file a “nil return” or a “zero return” – just to officially report that you collected no sales tax from local customers. Filing tax returns is much easier if you track your input and output taxes as you make sales and purchases. If you need some help with filing, check out how to prepare a sales tax return or how to prepare a VAT return.

You can also check out our tax registration and filing guides for states and countries around the world!

How to comply with sales tax automatically

Some say you should know the tax laws before you sell in new places.

The problem is that, as an online business, researching local tax laws in every market where you might want to sell is exhausting and time-consuming. On the other hand, if you don’t do your research, you might break the law.

If you find yourself often wondering “Do I need to collect sales tax for online sales in X?”, then you should consider tax compliance software that will monitor your sales tax liabilities automatically.

Quaderno is a “set it and forget it” solution to your sales tax woes. We don’t register your business for you, but once you set up your tax settings in Quaderno, the app will:

  • Keep your tax registrations in order, with the information easily at hand.
  • Calculate the correct tax amount on every sale around the world.
  • Automatically send tax-compliant invoices to your customers.
  • Monitor your sales around the world, so you know where you’re growing.
  • Alert you when you might be liable for taxes in a new place, so you can register in time.
  • Generate instant reports so you can see how much sales tax, VAT, or GST you’ve collected in each jurisdiction. These make filing returns just a matter of data entry!
  • Store all of this data securely for as long as you need.

If you’re curious how the software can help automate your tax processes and transform your growing business, try a risk-free trial of Quaderno.

Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the tax authorities.