Selling Online and Sales Tax: What You Need to Know

Before the advent of the internet, sales tax was fairly straightforward. Each state set their own sales tax laws, and when shoppers visited a physical storefront in that state, they knew that they would have to pay for a percentage of their purchases in sales taxes. Now that we have stores that operate solely online, however, things have gotten a little more complicated.

The basic rule for online stores, applied by the US Small Business Administration, is that if you sell online but also have a physical presence in a state, you are required to collect sales tax for that state. For a while, this worked in favor of large online-only retailers like Amazon, who were able to gain a competitive advantage by not collecting sales tax. However, states that relied on revenue from sales tax took issue, and several states have now passed what are being called “Amazon laws” that require large online retailers to collect sales tax even if they don’t have a physical storefront in the state.

How the Marketplace Fairness Act Affects Selling Online and Sales Tax

It’s understandably confusing that you’ll have to pay sales tax for online purchases in some states and not others. Congress is attempting to resolve this through the Marketplace Fairness Act of 2013, which passed in the Senate but has not yet passed in the House. If it passes, states will have to simplify their sales tax laws in exchange for being able collect sales tax from online retailers that bring in more than $1 million in sales in a year.

While the Marketplace Fairness Act is pending, it’s important that you pay attention to the existing sales tax laws in your state, whether you’re buying or selling online. In some states, you’ll have to declare the sales tax you would have paid at a brick-and-mortar store when you file your taxes, even if the online store didn’t tack it on.

If you want to learn more about selling online and sales tax, Nolo has put together a handy state-by-state guide that you can view here. Pay attention to changes at both the federal and state level, since the passage of the Marketplace Fairness Act would change the way online sales tax works in all states.