E-commerce Sales Tax in US & Canada

Disclaimer

Jibbio.com and its affiliates do not provide tax, legal or accounting advice.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

How E-Commerce Sales Tax Work

Ecommerce sales tax, also known as online sales tax or internet sales tax, is the tax you charge and collect at checkout from your online customers.

It is a small percentage of a product's price added to the checkout amount for the customer to pay, and works similarly to the sales tax you would charge a customer in a physical store.

Since sales tax is a 'consumption tax,' consumers only pay sales tax on taxable items they buy at retail. Most tangible personal property (e.g. electronics, clothing, appliances) is taxable.

SALES TAX & NEXUS | US

Forty-five U.S. states and Washington D.C. collect sales tax. In addition to a statewide sales tax, most states allow local jurisdictions (e.g. cities and counties) to collect local sales tax.

The only states that do not charge a sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon.

👉 The question is, "When do you have to charge, collect, and remit sales tax" on sales?

That's where "nexus" and "economic nexus" come in.

Economic Nexus

Nexus is a presence or connection in a state that requires a business to track and pay sales tax. Nexus can be established by having a physical presence in the state (e.g. retail store, office, or a warehouse) or having employees there. These conditions are different from state to state.

Economic nexus is a connection between a state and business when annual sales revenue and/or transaction quantity reach a threshold set by the state even without a physical presence (known as remote sellers), requiring you to register for a sales tax permit.

This threshold is generally $100,000 in annual sales, a number (e.g. 200) of separate sales transactions per year, and/or both conditions.

Threshold varies by state - see the list of economic nexus laws for each of the 50 states in the chart below.

For example, if you do business in California, you must charge sales tax based on the tax rate in California, even if your business is located elsewhere. This is known as "destination-based" sales tax sourcing, which most states use.

☝ In other words, the customer's location determines the sales tax rate to apply at checkout.

State Sales Tax Rates and Economic Nexus

(Updated July 2023)

Sales Tax Compliance

If your business has reached economic nexus in a state, you are obligated to collect and remit sales tax on applicable transactions. Each state has its own regulations and rules regarding sales tax nexus, and these can change often.

In the United States, there is no federal tax law and therefore each state can determine tax rates, taxable transactions, and payment frequency. In turn, this can create confusion due to the conditions involving tax, as businesses must stay up-to-date with sales tax laws in more than 12,000 tax jurisdictions in the U.S.

Sales tax compliance involves three main steps:

1. Register for a sales tax permit
2. Collect and record sales tax
3. File and remit sales tax payments

Register for a sales tax permit

Most states require businesses to register for a sales tax permit (also known as a seller's permit), which authorizes online sellers to collect sales taxes on purchases within that jurisdiction. Most states consider it illegal to collect sales tax without a permit because merchants may simply pocket the money.

Remember, you must register for a permit in every nexus state. In some states, remote sellers must obtain a sales tax permit when the economic nexus threshold is crossed (i.e. before the next sale). Other states, such as Colorado, allow more time (up to 90 days after economic nexus is established).

To register for a permit, visit your state's Department of Revenue website. Follow the steps to register your business. You’ll need to provide your EIN and other business identifying information.

Collect and record sales tax

Set up sales tax collection on your website or marketplaces where you sell products, so that sales tax is applied at checkout for the customer to pay.

Every Jibbio plan excluding "SOHO" automatically calculates the "sales tax rate" charged at checkout, based on the customer's location.

You are responsible for collecting, reporting, and remitting taxes.

File and remit sales tax

Every state has its own sales tax deadlines, rules, and payment frequency.

When you receive a sales tax permit, the state assigns you a tax filing frequency – due on a monthly, quarterly, semi-annual or annual basis.

When the due date arrives, you must report how much sales tax you've collected in to the local taxing authorities, in each state.

States want to know how much sales tax you collected in each taxing jurisdiction, including cities, counties and special tax districts.

❗ To stay compliant, it is important for businesses to stay updated on nexus laws and regularly evaluate their tax liabilities as non-compliance with sales tax regulations can result in fines and penalties. This may involve consulting with a tax professional or using tax software to keep track of sales tax rates and rules across multiple jurisdictions.

SALES TAX | CANADA

Sales tax laws in Canada might be considered less complex, when compared to the US tax system.

Sales Taxes in Canada

The Canadian sales tax system is a combination of federal and provincial tax jurisdictions.

Canada has sales tax at different levels of government, and sales tax rates are different for each province.

•Goods and Services Tax (GST)
•Harmonized Sales Tax (HST)
•Provincial Sales Tax (PST)
•Retail Sales Tax (RST)
•Québec Sales Tax (QST)

Some provinces will use one tax, and other provinces will harmonize (combine) their provincial sales tax with the federal sales tax (e.g. Harmonized Sales Tax (HST)).

Provincial Sales Tax Rates

See below for an overview of the sales tax type and rate, used in each province and territory.

Sales Tax Compliance

An online seller or e-commerce business will need to register to collect sales tax from Canadian customers if all of the following are true:

1. You are deemed to carry on business in Canada
2. You sell taxable supplies
3. You are not a small business supplier

Carry on business in Canada

Simply said, if you are doing business of any kind with Canadians for a profit, you are deemed to carry on a business in Canada.

Whether you use Canadian local advertising services to market your products or a Canadian carrier for shipping and logistics, then you are carrying on a business in Canada.

Sell Taxable Supplies

The majority of goods and services in Canada are considered taxable supplies. Hence, if you sell goods or services online, your products are taxable.

Small business supplier

A business with more than $30,000 CAD in sales globally in the last or last four consecutive quarters (year), is defined as a "small business supplier."

If you sold less than $30,000 in the last or last four (4) consecutive quarters, sales tax registration is optional.

Register for a Business Number

If your e-commerce business is required to register for sales tax, you will need to contact the Canada Revenue Agency (CRA) and request for a "Business Number." The Business Number is used for all communication with the (CRA).

You can request a Business Number by contacting a tax service office for your country.

Tax Filing Frequency and Due Dates

The filing frequency for your business will depend on the volume of taxable sales made in Canada.

•$1.5M or less in sales: Annual – your return is due three months after the end of fiscal year-end
•$1.5M – $6M in sales: Quarterly – your return is due by the end of next month
•$6M and over in sales: Monthly – your return is due by the end of next month

If you have a Business Number but have not collected or spent any sales taxes in Canada, you are still required to file a 'nil' return.

❗ If you do not file, the (CRA) may issue a notional assessment based on what they believe you should have filed for your business. In turn, your business will be liable for the assessed amount until you file an actual return.