Sales Tax 101 for Magento Small Business Merchants
June 18, 2015
This blog post is by Mark Faggiano, Founder and CEO at TaxJar.
Follow Mark on Twitter at: @taxjarmark
Sales tax is one of the trickier backend tasks every online seller faces. Sales tax is 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 Silver Partner TaxJar has solved this tricky problem for sellers. This post will walk you through every step from configuring your Sales Tax Automation 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.
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. In their darkest suspicions, unscrupulous sellers are 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, but if you want more in-depth knowledge about collecting the right sales tax rates, check out this guide on how much sales tax 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 district. That’s just one of many reasons why this step can be a nightmare.
This is also where TaxJar steps in. Our Sales Tax Automation extension integrates with Magento and other platforms or payment processors you use, determines how much you’ve collected in sales tax throughout the taxable period, and prepares return-ready reports for you. We’ll even AutoFile sales tax for you in 26 states (and counting!)
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! The Sales Tax Automation extension has put a lid on your Magento sales tax. Now that you’ve handled that, you can get back to doing what you love.
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Mark Faggiano is the Founder and CEO of TaxJar, a Magento Silver partner service, built to make 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.
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The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Magento. They are intended for informational purposes only and not intended as legal advice. Please contact your tax advisor or tax attorney if you have specific tax questions.