3 Sales Tax Questions Every Ecommerce Business Needs to Answer

Stick with me to the end and I'll share the number one sales tax mistake that ecommerce sellers make all the time, and how to avoid it.

0:37 Where are you selling

So let's start with the first and most important question. Where are you selling?

You don't need to collect sales tax in every state, only the ones where you have nexus. Now there are two main types of nexus.

Physical nexus means that you have a physical connection to the state. This includes where your business is located, where you have your inventory stored, or where you have a remote employee. If you have any kind of physical presence in a state, you have nexus there too.

The next one is economic nexus. This is based on sales volume or transaction count. If you sell a certain amount into a state, even with no physical presence, the state can still require you to collect sales tax. Many states set that threshold at a hundred thousand in sales or 200 orders per year, but that varies by state.

We do have a free download called 10 Steps to Ensure Sales Tax Doesn't Burn Down Your Ecommerce Business. It looks like this, and it goes into a lot more detail about nexus and has a complete list of those economic thresholds by state. The link is in the description below.

1:41 Rates vary by address

And here's where it gets tricky. Once you have nexus in a state, you have to figure out the exact sales tax rate, and rates aren't just by state. They can vary by city and county and even neighborhood. For instance, there's a street in Colorado where one side charges 4% tax and the other side charges 7.5%. Same street, different tax.

That's why sales tax tools look at the full shipping address and automatically apply the correct tax rate in real time.

2:11 Who are you selling to

Now let's talk about who you're selling to, because not every customer should be charged sales tax. For example, most wholesale customers, nonprofits, and schools or government agencies don't need to pay sales tax.

But here's the kicker. You can't just know they're exempt. You need paperwork to back that up. And that's where exemption certificates come in. And if you don't collect that paperwork, well, you're on the hook to pay that sales tax yourself.

This is especially common when sellers start mixing B2C and B2B in the same store. You need a system that can tell the difference and apply exemptions correctly. Otherwise it gets messy fast.

2:51 What are you selling

And finally, what are you selling? Because not all products are taxed the same. Groceries might be taxed in one state, but not in another. Clothing might be exempt, but only if it's under a certain price. Supplements, medications, digital goods, machinery, it all depends on the state.

You don't need to memorize all the tax rules. You just need to be the expert on your product. Tools like AvaTax or Shopify Tax calculate the rate and collect the tax. LedgerGurus can do the filing part for you. But you do need to get it set up right, because if you mislabel your products, you could either overcharge your customers or, worse, not collect tax when you should.

3:33 The biggest mistake sellers make

So here is the biggest mistake that I see sellers make. They collect sales tax before they register with the state.

It seems harmless, right? You just want to do the right thing, so you set up your channel to collect in all the states. But don't do that. One, it's illegal. Two, it's a huge pain to fix. We've helped sellers unravel that, but it's messy, expensive, and totally avoidable. So please register first, collect second, in that order.

4:06 Your takeaway

So here's your takeaway. If you want to stay compliant and stay out of trouble, just answer these three questions. Where are you shipping? Who is buying? And what are you selling? That's the foundation of sales tax. And if you get those right, you're already way ahead of most sellers.

Need help making sure that you're set up the right way? Well, guess what? That's exactly what we do at LedgerGurus. We can set it up for you, manage it, and generally take it off your plate. Get in touch with us. I'll leave a link in the description.

Now, if this was helpful, give it a like, share it with a fellow seller, and drop a question in the comments. And if enough people watch this video, we'll make one about exemption certificates and how to manage them without losing your mind. See you next time.