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Sales Tax 101 For Magento Sellers
Information provided by TaxJar
Prepared by Mark Faggiano
November 2014
Copyright © 2014 TaxJar. www.taxjar.com
Copyright © 2014 TaxJar. www.taxjar.com
We put together this guide to sales tax for sellers who need a better way to manage the hassles of sales tax in their Magento stores.
After reading this guide, you’ll understand the basics of sales tax for online sellers, and we’ll present you with the solution for all of your sales tax troubles.
And hey, if you’re busy and just want to cut to the chase, we hear you. Skip down to part 2 where we solve all of our sales tax problems with the Sales Tax Automation by TaxJar plugin for Magento sellers.
Table of Contents1. Sales Tax 101 for Magento Sellers
2. Sales Tax Automation for Magento Sellers
3. Installing Sales Tax Automation from the Magento Connect Store
4. Next Steps
About the Authors:
Magento’s “Sales Tax Automation” plugin is powered by TaxJar. TaxJar was founded by small business experts with a simple mission: helping online sellers simplify the hassles of tracking and filing sales tax so they can focus on growing their businesses rather than dealing with compliance issues. The customer-driven company has a successful history of developing tax and accounting systems used by tens of thousands of small businesses to solve common operational problems.
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Sales Tax 101 for Magento Sellers
As an online seller, you want to understand every nuance of your business. Some aspects – like sales tax – can get overwhelming quickly.
If you fall into this camp, then this quick guide is for you. The goal is to explain the basics of sales tax for new eCommerce sellers (or seasoned eCommerce sellers who have questions.)
As a Magento seller, you must also understand how to configure your Magento store to collect sales tax, all the while staying compliant with tax codes and giving your customers the fast, efficient checkout experience they’ve come to expect. TaxJar has your back on all of this.
Let’s get started:
The Basics of Sales Tax
Forty-five states in the United States levy a sales tax. Merchants in these states are required to charge sales tax to buyers.
Sales tax is considered a “pass-through” tax, because the merchant is only holding the taxes collected before remitting it to state and local taxing authorities at a set time (usually either monthly, quarterly or annually.)
State and sales tax funds are used to fund state projects and initiatives, including schools, roads, public safety departments, etc.
In the U.S., states have quite a bit of leeway with sales tax administration. Because of this, all 45 states that levy a sales tax have different rules and laws when it comes to sales tax. Sales tax rates can vary by state and locality, too.
One example of how state sales tax rules vary is that some states require you to charge sales tax on shipping charges, while others do not. Another example: some states might require you to renew your sales tax permit periodically, while others do not.
Even more confusing - some local areas may levy sales tax even in states with no statewide sales tax (such as in Alaska.)
It’s important to get in touch with your state’s taxing authority or an experienced accounting professional should you have questions about sales tax. Here’s a map with plenty of info about how to contact each state’s taxing authority.
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TaxJar: Introduction to Sales Tax for Online Resellers
Determining Sales Tax Nexus
Online sellers must collect sales tax in states or localities where they have “sales tax nexus.”
While all states have a slightly different definition of this term, sales tax nexus is generally defined as “presence” in a state that’s significant enough so that a business has to comply with the state’s sales tax law.
Presence can include – but is not limited to – an office, an employee or a warehouse.
If you have sales tax nexus in a state that requires sales tax collection, then you’re required to collect sales tax from all buyers in that state regardless of where the item is shipped from.
If you do not have sales tax nexus in a state, then you’re not required to collect sales tax when you sell online to buyers in that state (regardless from where the item is shipped).
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TaxJar: Introduction to Sales Tax for Online Resellers
3 Common Examples of Sales Tax Nexus:
1. Home state nexus
You live and run your eCommerce business in Texas. Because you have a physical presence in Texas, you have “sales tax nexus” there, and therefore are required to collect sales tax from buyers in the state of Texas.
2. Employee nexus
You live and run your eCommerce business in the state of Florida, but you hire your sister in Georgia to help you. Because you operate out of Florida and have an employee in Georgia, you now have sales tax nexus in Florida and Georgia and must collect sales tax from buyers in both states.
3. Inventory nexus
Most states have ruled – either definitively or vaguely – that 3rd party fulfillment constitutes nexus. This means that if you store your inventory in a warehouse in a state, then that constitutes sales tax nexus. So if you live in Wisconsin, but store your inventory in California for the purposes of faster shipping, then you have sales tax nexus in both states.
Example #3 can be especially cumbersome for 3rd party sellers, whose inventory may be stored in states other than their home state. Third-party selling, and the associated sales tax registration and filings required, can create a huge administrative burden on unsuspecting eCommerce merchants.
Once you’ve determined where you have sales tax nexus, you’re required to do two things:
a.) Obtain a sales tax permit (sometimes called sales tax license) for that state (in the cases of third-party sellers this means acquire a license in every state where you warehouse inventory)
b.) Begin collecting sales tax in that state (most states consider it illegal to collect sales tax without a permit)
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Collecting Sales Tax from Buyers
Every eCommerce business owner wants their business to grow and thrive. Growth can’t be achieved if you have to manually calculate how much sales tax to collect every time you make a sale.
A note on sales tax rates: States set a rate, and then localities can add a percentage on top of those rates. For example, in the 90210 zip code, the tax rate is the 6.5% California statewide rate, a 1% Los Angeles County rate, and an additional 1.5% local rate, for a total of 9.0% sales tax rate.
Luckily, Magento and most other eCommerce channels allow you to automatically collect sales tax from your customers. Along with this guide to Magento that you’re reading now, we’ve put together several channel-specific guides to collecting sales tax. Visit the TaxJar Education Center for more information.
Why did we have to put these guides together? Because, unfortunately, collecting sales tax via various online platforms is rarely simple. This is especially true if you collect sales tax at multiple rates, such as is the case for sellers in destination-based states. This is why the Sales Tax Automation extension for Magento sellers is so useful. Click here for more about how we can help.
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TaxJar: Introduction to Sales Tax for Online Resellers
Origin-Based Sales Tax States and Destination-Based Sales Tax States
When it comes to determining tax rates, most states fall into one of two major buckets: “origin-based” sales tax states and “destination-based” sales tax states.
In layperson’s terms, this means that some states require you to collect sales tax at the rate effective at the point of “origin” (i.e. your office or warehouse) while most states require you to collect sales tax at the rate of the “destination” (your buyer’s address.)
Origin vs. Destination-Based Sales Tax Examples
Let’s say you live in (or have a warehouse or office in) Irving, Texas, but sell to someone in Archer City. Texas is an origin-based sales tax state, so you would charge any buyer in the state of Texas your home rate of 8.25%. (That’s Texas’s statewide 6.25% rate plus Irvin County’s 1.0% plus a local Dallas MTA rate of 1.00%.) You don’t need to take your buyer’s address in Archer City into account.
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TaxJar: Introduction to Sales Tax for Online Resellers
But if you live in Stamford, New York the rules are different. Since New York is a destination-based sales tax state, you’re required to collect sales tax at the effective rate at your buyer’s address. So if you operate your business in Stamford and sell to a buyer in Buffalo, then you are required to charge the seller 8.75% sales tax – the total sales tax rate at their locality in Buffalo. (That’s a New York state base rate of 4.0% plus the Erie County rate of 4.75%]
For more information, see this map of Origin vs. Destination Sales Tax Collection in the United States.
We know that some online sellers also sell offline at brick and mortar stores, trade shows, craft fairs, etc. If you find yourself in a situation where you need to lookup a local sales tax rate, check out TaxJar’s Sales Tax Calculator as a quick reference.
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TaxJar: Introduction to Sales Tax for Online Resellers
Once you have determined your sales tax rate and collected sales tax from buyers, you then have to remit the funds you collected to your state(s). (Remember, sale tax is a pass-through tax and you don’t get to keep it!)
If you’re concerned that you haven’t collected the right amount of sales tax from buyers, check out TaxJar’s “Detailed Sales Tax Analysis” feature. We’ll search your channels and make sure you collected every penny of sales tax you were supposed to collect.
Why is this so important? Sometimes your state can decide to perform a sales tax audit on your business. We’ve heard from many sellers that these audits are more arduous than IRS audits. This is just another reason why it’s so important to get a handle on sales tax early – before the state gets a handle on you!
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TaxJar: Introduction to Sales Tax for Online Resellers
Remitting Sales Tax to State Taxing Authorities
A state’s taxing authority is generally called the “[State] Department of Revenue” though it can go by other names. (For example, California’s taxing authority is the “California Board of Equalization.”)
When you apply for your sales tax permit with your state’s taxing authority, they will assign you a frequency at which to file and remit sales tax. This is generally monthly, quarterly or annually, and often depends on your sales volume or the volume of sales tax you collect.
Most states require that you file a sales tax “zero return” even if you do not owe sales tax. If you do not file, you could be subject to penalties. Pay close attention to instructions you receive when you secure your sales tax permit.
Sales Tax Filing Due Dates
Be warned that while many states set their sales tax due date as the 20th of the month, states can vary wildly in their sales tax due dates. If you are a quarterly payer, be sure you are aware of which date your state considers a “quarterly” due date. Sales tax filing due dates can vary to a surprising degree.
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TaxJar: Introduction to Sales Tax for Online Resellers
How to File Sales Tax Returns
As with sales tax rules, every state has slightly different requirements for filing sales tax returns.
Most states allow you to file and pay online, and some even require it.
Be warned that some states are harsh taskmasters (usually ones that are destination-based for tax collection), and require you to report how much sales tax you collected in every single sales tax district. Some states have hundreds of sales tax districts, so this can easily turn into a nightmare – especially if you’re filing in multiple states at a time.
Destination-based sales tax state Washington requires eCommerce sellers to file sales tax by jurisdiction.
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TaxJar: Introduction to Sales Tax for Online Resellers
TaxJar has you covered here, too. After you connect your eCommerce accounts to TaxJar, we’ll subtotal your sales and sales tax collected by state, and country, city and special tax when it’s required. With TaxJar, you don’t have to deal with spreadsheets or sales tax tables to try and determine how much sales tax you collected from each zip code.
TaxJar makes filing sales tax in destination-based states like Washington dead simple.
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Summary of the Basics of Sales Tax for Online Sellers
To be sales tax compliant as an online seller you must:
1. Determine where you have sales tax nexus
2. Register for a sales tax permit in each state where you have nexus
3. Set up your channels to collect the correct amount of sales tax from buyers
4. Periodically file sales tax for each state where you have sales tax nexus
This may seem overwhelming, but that’s the big reason we created TaxJar for online sellers.
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Tax Jar will:
1. Import the sales tax you’ve collected through your eCommerce channels
2. Prepare return-ready reports for each state
3. Remind you when sales tax is due
4. AutoFile your sales tax returns for you in 26 states (and counting!)
5. And most importantly, save you hours and hours of manually dealing with sales tax tables and spreadsheets
If you have any questions about sales tax, we invite you to ask below in the comments or to join our Sales Tax for eCommerce Sellers Facebook Group where real online sellers and tax experts gather to discuss sales tax.
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Sales Tax Automation for Magento Sellers
So what does all this have to do with you as an online seller who runs your store on the Magento platform?
Until recently, Magento sellers faced the double whammy of needing to be able to program the backend of your online store to collect sales tax while also needing to be intimately familiar with the sales tax code and always-changing rates.
…That is, until Sales Tax Automation by TaxJar came along.
This easy-install Magento plugin:
• Sets up Sales Tax Collection Automatically
• Configures Your Sales Tax Rate(s)
• Supports Sales Tax Nexus in Multiple States
• Accounts for Complex State Sales Tax Rules
• Installs Easily into Your Magento Store’s Backend
• Never Alters Your Customers’ Checkout Experience
• Has No Set-up Fee
Without Sales Tax Automation, Magento sellers have to understand whether they lived in an origin or destination-based sales tax state, or even in a modified-origin based state like California. Sellers also have to manually tell Magento how much sales tax to collect on each sale. This requires technical know-how AND an intimate understanding of the tax code.
Assuming a Magento seller gets that far, when it comes time to files sales tax returns, Magento users in destination-based states (i..e the majority of states) have to manually subtotal sales and taxes collected for every city and county just to comply with the state’s strict reporting requirements.
There are a few other sales tax automation extensions for Magento, all of which have their downsides. Some require your store to ping their servers, meaning that your customer’s checkout experience could be affected if this 3rd party extension experiences a slow down or outage. Others add the sales tax into the displayed price of the item in your Magento store rather than showing a sales tax total during checkout. This can cause psychological “sticker shock” and affect how you compete on price with rivals.
Sales Tax Automation from TaxJar vastly simplifies the way you, as a seller, handle sales tax in your Magento store.
How do we do it?
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Sales Tax Automation Automatically Configures Your Sales Tax Rate – Using just your address, we set your sales tax rates and make sure you are collecting the correct amount of sales tax from customers. If you have sales tax nexus in multiple states, we have your back there, too. Subscribe to TaxJar, and we’ll update your sales tax rates every month. No more worrying that your state’s department of revenue is going to come knocking.
Sales Tax Automation Understands Your State’s Tax Rules So You Don’t Have To – Do you operate your business out of an origin-based or destination-based sales tax state? Where do you have sales tax nexus? Does your state require sales tax on shipping? …Or does all this sound like gibberish to you? That’s okay, because we have this covered. What if you live in California or another state with complex sales tax rules? We have your back there, too.
Sales Tax Automation Works With What You Sell – Do you sell some sales tax-exempt items? We allow you to flag those items and customize how you charge sales tax to your customers.
Sales Tax Automation Takes Care of Sales Tax with One Click –TaxJar seamlessly integrates with your online store from within the Magento Connect Store. It requires little to no technical expertise to get set up.
Your Customers Won’t Notice a Thing – Best of all, unlike other sales tax solutions, TaxJar doesn’t change your checkout experience or alter your store’s performance in any way. Once you’ve set up Sales Tax Automation, only you will notice it’s there – and that’s only because we make your sales tax experience so much simpler.
Note: Keep in mind that users must have their Magento installation configured accord-ing to the official Magento Community Edition requirements page. You may check your Magento installation by following the instructions here.
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Installing Sales Tax Automation from the Magento Connect Store
Ready to get started automating your sales tax headaches? Sales Tax Automation from the Magento Connect store is absolutely free to install. When you install you get tax rates for every zip code in the state where you have sales tax nexus. If you want to get updated rates (we update rates automatically at the beginning of each month) or if your want to use our automated reporting features, then pricing begins at $29.95 per month.
Let’s get started:
In your Magento Admin Panel, click on the System option.
In the drop down menu you’ll see Magento Connect. A sub-menu there will lead you to Magento Connect Manager. Click on this option.
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TaxJar: Introduction to Sales Tax for Online Resellers
You’ll likely be asked to log in with your normal user name and password.
Under “Install New Extensions” you’ll see “Search for modules via Magento Connect.” Click on this link.
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TaxJar: Introduction to Sales Tax for Online Resellers
This will lead you to this page in a new tab, the Magento Connect site. Search for TaxJar in the search bar in the top right.
There it is! Click on the logo to get started.
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TaxJar: Introduction to Sales Tax for Online Resellers
Here is the page you’ll see. Click on the blue “Install Now” button.
After you read the extension license agreement if you so choose, click the little box that says you agree with the terms. Now click on the “Get Extension Key” button.
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TaxJar: Introduction to Sales Tax for Online Resellers
Clicking the “Select Key” button will highlight the URL you need for the next section. Copy the URL by right-clicking and selecting Copy or use a shortcut like Ctrl&C.
Click on the tab that should still be open, “Magento Downloader.” This will take you back to that page where you can paste the extension key.
Paste the key into the box under Install New Extensions where it says “Paste extension key to install.” Then click the “Install” button.
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TaxJar: Introduction to Sales Tax for Online Resellers
You’ll see a list of what’s required for you to install. Most of these should already be installed except TaxJar, so just click Proceed.
After the install finishes (it should just take a second or two), scroll up and click on the “Return to Admin” link.
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TaxJar: Introduction to Sales Tax for Online Resellers
There’s a small idiosyncrasy with Magento where certain extensions won’t “take” until you log out and back in. So go ahead and click on Log Out here at your Admin Panel.
And then log back in.
Now if you head to System then Configuration in your Admin Panel…
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TaxJar: Introduction to Sales Tax for Online Resellers
...you’ll see your brand new option, Sales Tax Automation with TaxJar! Click on it to finish our process.
Now you need to get the API from TaxJar, so click on the API Token bar then the link that says “TaxJar’s Account Screen.”
Sign into your TaxJar account or sign up for the free trial which just takes a second. TaxJar will ask you if you want to add other data sources, like PayPal or other eCommerce platforms. You may want to skip that and come back to that later.
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TaxJar: Introduction to Sales Tax for Online Resellers
Note: Do you have sales tax nexus in more than one state? If so, you’ll first need to add all states where you wish to collect sales tax to your TaxJar account.
To configure multi-state sales tax nexus:
From your TaxJar dashboard, click “Change” next to “Your States with Nexus.”
Use the “Add State with Nexus” button to add any other states where you have sales tax nexus.
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TaxJar: Introduction to Sales Tax for Online Resellers
If you don’t have multi-state sales tax nexus or if you have added all the states where you do have sales tax nexus, click on the “Account” option in the upper right.
From here, you’ll need to retrieve your API key. Click on “API Access” in the left navigation.
On the next page, click the blue “Generate My API Token” button.
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TaxJar: Introduction to Sales Tax for Online Resellers
You should see a message stating your token has been generated. Click on API Access again.
On this page you’ll see your unique API token. Copy it.
Click back on the tab with your Magento Admin Panel page open.
Copyright © 2014 TaxJar. www.taxjar.com
TaxJar: Introduction to Sales Tax for Online Resellers
Paste the API token into the box.
Now just click on the orange “Save Config” button. This starts the process of finding your states with nexus, and downloading the appropriate tax rates for each of those states.
After it finishes, you’re ready to go!
Copyright © 2014 TaxJar. www.taxjar.com
Next Steps
To find out more about TaxJar’s automated reporting for your store, visit www.TaxJar.com.
Using TaxJar makes tracking and paying sales tax simple
• SAVES HOURS per filing period with automated sales tax reports for every state.
• EASY AND RELIABLE reports mean no more spreadsheets or state websites!
• LOW COST starting from as little as $9.95 per month
About TaxJar
TaxJar was founded by small business experts with a simple mission: helping online sellers simplify the hassles of tracking and filing sales tax so they can focus on growing their busi-nesses rather than dealing with compliance issues. The customer-driven company has a suc-cessful history of developing tax and accounting systems used by tens of thousands of small businesses to solve common operational problems.
Learn More. Watch the Video.
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