Estimated read time: 3 minutes, 13 seconds
You’ve invested considerable effort into improving your product offerings and strategizing ways to scale your digital business, the last thing you’d want to do is spend more of your precious time navigating ecommerce sales tax compliance.
To help you make the most of your time, we’ve written a short blog post breaking down ecommerce sales tax for digital products.
Let’s get started!
What is sales tax and how is it calculated?
If you think that your digital business is exempt from collecting sales tax because the recent Wayfair vs. South Dakota ruling is geared more towards online retailers selling physical goods, think again. Your best bet might be to adhere to the current ruling and following the evolution of this regulation as the Supreme Court works towards providing a clear definition for digital goods and services.
Not counting the District of Columbia, sales tax is currently governed by 45 different sets of state-level laws. With New Hampshire, Oregon, Montana, Alaska, and Delaware being the 5 states without a sales tax. Because each state has the jurisdiction to make and enforce its own rules around proper sales tax compliance, you’ll want to make sure you’ve reviewed the laws of all the states you operate your business in. Taking a blanket approach could leave your business at risk of improper sales tax compliance.
But why collect sales tax in the first place?
Sales tax provides states and localities an additional form of funding for expenditures like public safety, healthcare, and education. Sales tax falls under the category of consumption taxes, meaning it’s only charged when a buyer purchases goods or services. The seller or online merchant is responsible for collecting the sales tax on all applicable transactions and then remitting it to the state government.
When might you be required to collect sales tax for online purchases?
- You’ve established a physical presence or “nexus” in the state you’re doing business in and will be required to collect taxes from online customers in that state.
- You aren’t required to collect sales tax for online sales in states that you don’t have a physical presence in. With the June 2018 Supreme Court ruling in Wayfair vs. South Dakota, this might not be the case any longer. Online stores may be expected to start collecting sales taxes regardless of whether or not they have a physical presence in the states they are doing business in.
What is a Nexus?
You can think of a “Nexus” as the connection or tie between your online store and the state(s) you’re doing business in. Because establishing a nexus can occur through a handful of ways, some online businesses are caught off guard when they suddenly find out that they have to start collecting sales tax on the goods they sell over the internet. Here are some examples of how this can happen:
- You have a physical presence. It’s important to recognize that your office spaces, warehouses, and brick-and-mortar stores all qualify!
- You employ individuals (employees, contractors, salespersons) in the state.
- You’ve established an economic nexus (sales nexus). This will vary between states but it’s usually triggered after you’ve conducted a certain number of transactions or exceeded a sales revenue threshold.
Regardless of whether you’re an up-and-coming startup or an established enterprise-level business, your digital business needs to make sure you’re up to date with all tax complexities concerning the sale of digital products like digital assets, software, and SaaS. Partnering with an all-in-one ecommerce platform like FastSpring can help your business stay compliant and protect your business against costly fines that may impact your sales revenue.
Ready to see how FastSpring can take the hassle out of tax compliance and help you grow your business? Click here to request your own free FastSpring demo today!