January 10, 2017
Sales tax is one of the trickier backend tasks every online seller faces. It’s controlled at the state level, and every state is different. Rates vary widely across the board, and even who has to collect sales tax varies from state to state.
Magento Premier Partner TaxJar has partnered with Magento to solve this tricky problem for sellers. The TaxJar Sales Tax Automation extension is included with your Magento Enterprise Edition license, and this post will walk you through every step from configuring the extension to making your first sales tax filing.
Step 1: Install Sales Tax Automation by TaxJar
This initial step makes all the other steps easier. TaxJar’s Sales Tax Automation Magento extension eliminates the complexity of figuring out how much sales tax to collect, and applies the correct sales tax rates to all of your customers. Better yet, it doesn’t slow down or break your checkout. It’s also extremely easy to install so you can check it out and give it a whirl with no risk. And it’s absolutely free to Magento merchants.
- Install TaxJar Sales Tax Automation for Magento (Documentation)
- Install TaxJar Sales Tax Automation for Magento 2 (Documentation)
Step 2: Determine Where You Have Sales Tax Nexus
When you’re configuring the Sales Tax Automation extension we’ll ask you in which states you want to collect sales tax. These are states in which you have “sales tax nexus.”
Sales tax nexus is basically just a fancy way of saying a “significant connection” in a state. You’ll essentially always have sales tax nexus in the state where your business is based. Some business activities might cause sales tax nexus in other states, too. For example, most states consider having an employee, contractor, third-party affiliate, repairperson or sales person in the state, storing products in the state, or selling at a trade show or craft fair in the state to create nexus, too.
Here’s a map so you can find out more about what creates sales tax nexus in every state.
When you have sales tax nexus in a state, your next step is to:
Step 3: Register for a Sales Tax Permit
States require that sellers have a permit to collect sales tax in their name. This is their way of keeping track of commerce activity in the state. Don’t skip this step! Many states even consider it unlawful to collect sales tax in their name without a permit. So don’t open yourself up to the suspicion of being an unscrupulous seller that is telling customers they’re collecting sales tax but then pocketing the sums for themselves.
Here’s a list of how to register for a sales tax permit in every state.
Step 4: Collect Sales Tax from Customers
Collect sales tax from customers in states where you have sales tax nexus. The Sales Tax Automation extension for Magento configures and takes care of this for you for free. If you want more in-depth knowledge about collecting the right sales tax rates, check out this guide on which sales tax rates to charge your customers.
Step 5: Calculate How Much Sales Tax You’ve Collected
Your state gave you sales tax due dates when you registered for your sales tax permit in Step 3. Or, if you registered in more than one state, you probably have multiple due dates. Some states want you to file monthly, others quarterly, and others annually. This is usually dependent on your sales volume. The general rule of thumb is that the more you sell the more often you file sales tax.
When a sales tax due date rolls around, it’s time to determine how much sales tax you’ve collected over the taxable period. If you only sell on one shopping cart and only have sales tax nexus in one state, finding this information can be fairly simple. But if you sell on multiple channels or have nexus in multiple states, figuring out how much sales tax you’ve collected quickly becomes exponentially harder.
You have to make sure you’re reporting the right amount of sales tax from the right taxable period for the right state. This may mean pulling several reports and then trying to combine them.
To make matters worse, a majority of states don’t just want to hear about how much state sales tax you’ve collected. They also want you to break down how much you collected by city, county, or other special taxing districts. That’s just one of many reasons why this step can be a nightmare.
This is also where TaxJar Reports steps in. TaxJar Reports integrates with our Sales Tax Automation extension for Magento and the other platforms or payment processors you sell on. It determines how much you’ve collected in sales tax throughout the taxable period, and prepares sales tax return-ready reports for you. We’ll even AutoFile your sales tax returns for you in most U.S. states.
Sales tax calculations for Magento sellers are free, while TaxJar Reports is an additional service starting at just $19/month for up to 1,000 transactions.
Speaking of filing, your next step is to:
Step 6: File Sales Tax
Once you’ve determined how much sales tax you collected, it’s time to file a sales tax return with the state. You can do this by mail (old fashioned and cumbersome), online with the individual state, or by using TaxJar’s AutoFile.
There are a couple of important things to remember when filing. First, many states want you to file a sales tax return even when you haven’t collected any sales tax. They consider it a “check in” and may even fine you if you don’t file.
Second, some states realize that asking merchants to collect sales tax on their behalf is a burden. These states will provide sales tax discounts to help alleviate the pain a little bit. Here’s a handy list of states that provide sales tax discounts.
And that’s it! You’ve put a lid on your Magento sales tax. Now that you’ve handled that, you can get back to doing what you love—running your business.
About Mark Faggiano
Mark Faggiano is the Founder and CEO of TaxJar, a Magento Premier Partner. TaxJar makes sales tax compliance simple for eCommerce sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life. Follow Mark on Twitter at: @taxjarmark