E-Commerce Sales Tax

May 17, 2019

E-commerce used to be exempt from the sales tax that would affect brick-and-mortar businesses, but that’s no longer the case. Brush up on e-commerce sales tax rules to make sure you’re running your business by the books and avoiding a hefty fine or lawsuit from non-compliance.

What Is E-Commerce Sales Tax?

Sales tax is the tax levied by a State, city or other municipality on consumer goods or services, usually expressed as a percentage. Within the U.S., for example, 45 states have sales tax. Select municipalities (such as Washington, D.C.) and counties have their own tax, too, meaning consumers may be taxed twice on purchases. Brick-and-mortar businesses are required to tax consumers, then file a sales tax return.

With e-commerce, companies must collect sales tax and file a sales tax return in areas where they have nexus, which is defined as a significant physical presence in the geographic region. For instance, if your e-commerce business has an office in London, then you would be considered to have nexus there. If you had a warehouse in California or an employee in Texas, that would constitute nexus as well. 

Last year, the U.S. Supreme Court issued a new ruling, which said that states were within their constitutional rights to collect e-commerce sales tax, provided companies met the nexus rule. In addition to the above examples, your business may need to pay sales tax if you have remote employees, attend trade shows, work with a drop shipper, or use Amazon fulfillment services in a particular location.

If your e-commerce business has a physical presence in the U.S. that would meet the nexus rule, then you must keep up with not only state sales tax laws, but city and county laws as well. 

E-Commerce Sales Tax Laws in the EU

E-commerce sales tax issues aren’t solely a U.S. concern, either. In Europe and the U.K., value-added tax (VAT) also applies to e-commerce. The eurozone is phasing in a new rule, which will fully go into effect by 2021. With the new rule, e-commerce shops that sell more than 10,000 euros will be required to pay VAT on e-commerce sales. Companies that do not meet this financial threshold can decide to be taxed that way anyway or pay one-stop-shop or OSS fees on their transactions.

VAT rates fluctuate by the type of item and range from 0 to 20 percent. Entrepreneurs can also charge VAT percentage on delivery. Something like an e-book, which has no physical delivery charge, comes with a 0 percent delivery VAT charge and a 0 percent VAT. In contrast, an antique item sold on eBay U.K. would be subject to 20 percent tax, both on the item and delivery.

If that weren’t confusing enough, consider that e-commerce sales are exempt from VAT when the buyer lives outside the eurozone or when selling to a merchant located in another EU country (rather than an individual).

Needless to say, these e-commerce sales tax rules make it time-consuming for online entrepreneurs to keep up to date with their filings and stay in compliance with laws. Even something as simple as determining where your company has nexus could be a full-time job.

Get Help With E-Commerce Business Tax

At Expat CPA, we provide accounting and tax filing services for U.S. expats — including e-commerce entrepreneurs and self-employed individuals. We work with expats to file tax returns dealing with complex issues, from foreign-earned income to e-commerce profits. 

Leave the complicated tax and accounting issues to our tax professionals, who bring experience gleaned from the Big 4 international accounting firms. Learn more about the services we offer or contact us now to get a quote.

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