Taxes and VAT in eCommerce – What You Need to Know

What Is Sales Tax?

Sales tax is an additional cost tacked onto the price of goods and services, and it’s levied by the government.

If your store is located in a place that collects sales tax, you need to add the tax amount to the customer’s purchase. After they make the payment, you’ll send the tax amount to the appropriate tax authority.

What Is eCommerce Sales Tax?

Sales tax is also collected for selling products or services online (called eCommerce sales tax), but the rules are a little different than for single brick-and-mortar stores. ECommerce sales tax software can automatically calculate the total for you, no matter where the buyer is.

When Is eCommerce Sales Tax Collected?

Whether or not sales tax is collected and how much is collected depends on several factors. These calculations can be performed by a sales tax integration solution.

1. Where you’re doing business

You’re considered to be “doing business” wherever you have a physical presence, such as a warehouse, office, or store. It also includes where your business personnel and affiliates are located, including drop ship providers. Anywhere you store your inventory is another place you’d be doing business if you also sell in that location.

In the United States, sales tax is imposed by the state government. Not all states collect sales tax, so if you’re doing business only in those states, then you typically don’t need to include sales tax. However, that changes if you cross a certain threshold for amount of revenue or number of transactions made.

2. One state or many states?

Whether eCommerce sales tax is collected also depends on whether you’re selling to customers in one state or across many states. For example, if you make items at home and sell them online to a customer if your same state, then you’d only be doing business in that state.

However, if you sell your products through Amazon using their fulfillment services, you’d be sending the items to Amazon’s warehouse first which might be in another state. When customers purchase your product in that state, you might need to collect the sales tax imposed by that state, if there is any. Working with other  businesses almost ensures that you'll be dealing with B2B sales tax.

3. What products you’re selling

Most products that are considered personal property are subject to tax. However, some items are exempt in certain states, and some items have reduced or alternate sales taxes.

4. Your state’s sales tax sourcing

States get to choose whether they’ll charge eCommerce sales tax based on the origin or destination of business sales. In other words, eCommerce sales tax is determined either by where the business is located (origin-based) or where the product is sold / the customer’s shipping address (destination-based). This is called sales tax sourcing since it refers to the source of the sales tax.

So, if your business is in a state with origin-based sales tax, when you sell to someone in another state, you charge them the sales tax of your state. If your business is in a state that’s destination-based, then when you sell something to someone in another state, you charge them the sales tax of their state.

Steps for Collecting eCommerce Sales Tax

Here's how to deal with sales taxes for your eCommerce business.

Step 1. Check whether your state collects sales tax.

Make sure to check all the states where your business is operating, including locations of warehouses and inventory storage, staff, offices, etc.

Step 2. Check the sales tax sourcing of your state.

This will help you determine what sales tax you’ll need to charge if you sell products across multiple states. If you sell products internationally, check what the sources of tax collection are for the countries and local areas you’ll be doing business in.

Step 3. Check the taxability of your products in those states.

Not all items are taxable, and some have different sales taxes. Each state determines which products are taxable and which aren’t, so it’s important to check each state your business is affiliated with and apply the appropriate eCommerce sales tax when doing business in each location.

If your products are indeed taxable, then continue to next steps.

Step 4. Register for a sales tax permit.

To register for a permit, contact the tax authorities of your state. They’ll ask you for information about your identity, business entity, and business activities. Then they’ll issue you a sales tax permit and designate how frequently you need to file sales tax, which is usually monthly, quarterly, or annually.

Step 5. Set up sales tax collection.

Once you have registered, you can start collecting tax online with eCommerce tax software. You’ll need to set this up differently based on the platform where you’re selling your products.

If it’s your own eCommerce platform, you’ll need to determine and establish tax rules and mechanisms that fit your situation. If you sell products on another eCommerce website such as Amazon or eBay, make sure you follow their instructions for eCommerce sales tax collection when setting up.

Step 6. File the collected eCommerce sales tax.

When it’s time to file sales taxes based on the filing frequency requirements of that state, you’ll report the amount of sales tax you’ve collected from each taxing jurisdiction (even if you didn’t collect any).

This includes each state, county, city, and any other taxing jurisdiction in each state where you’ve conducted business. This can be complicated and becomes even more complicated if you sell products on more than one platform or internationally.

In addition, some states realize the burden placed on you from acting as a tax collection agent, so they allow you to keep a small percentage of the collected sales tax as a discount. If your state allows such a discount, this is another thing you’ll need to consider when filing your sales taxes.

Our eCommerce platform as well as our integration solution make filing much easier with automated tax calculators and other sales tax automations and integrations. You can save a lot of time by automating processes rather than doing them manually.

VAT – Value-Added Tax

Value added tax (VAT) is a consumption tax, similarly to sales tax. The difference between sales tax and VAT is that VAT is charged at every point along the supply chain where value is added, which includes production, distribution, and sale to the end consumer. VAT is common in the European Union (EU), while sales tax is common in the US.

Many amendments were announced in 2021 with the aim of simplifying VAT-related obligations related to eCommerce. The main changes are:

• Way of dealing with the online market as well as distributors
• Creation of IOSS (new export in one place)
• Introduction of special arrangements for certain items

How Does VAT Work in the EU?

All countries in the EU set their own values for VAT. This rate must not be less than 15% for most items, and not less than 5% for certain items and services, with other select products and services being exempt from VAT.

You will mostly find VAT values for countries on the websites of the tax administration of that country.

Very often in the EU VAT is applied directly to the price, but then it is indicated that the price includes VAT. Otherwise, VAT does not apply, and distributors omit it from the price.

In the EU, there’s a threshold for how many sales you can make before you must register for VAT or get a VAT Registration Number (VRN). Once you own a VRN, you’ll have to charge VAT on sales. You can get a VRN voluntarily, too, and it depends on your business model as to whether or not that makes sense.

If your company delivers in or across the EU, you must pay attention to the EC or ESL sales lists. They are submitted with your VAT return and track sales and inventory movements.

Do I Pay VAT in the EU if I Sell from Outside Europe?

If your company delivers into or out of the EU, you must have a European identification number or Economic Operators Registration and Identification, otherwise known as an EORI. The EORI with your VRN is used to identify the shipment, so that you can later refund the VAT you paid at customs.

You obtain an EORI number from your national customs authority, and this must be done before products go through customs.

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