How Do E-Commerce Websites Calculate Sales Tax for Online Orders?

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ECommerce Websites Ready ArtworkHave you ever purchased something online from an e-commerce website? Perhaps school books through Amazon.com, clothes through e-Bay, or a small shop across the country selling homemade jam? The internet has made shopping online quite convenient, but have you ever wondered how taxes are calculated when making an online purchase?

How To Calculate Sales Tax

There are two ways that e-commerce retailers collect taxes from online orders.

E-commerce retailers either charge the buyer’s local tax rate, or establish a “NEXUS” rate, which means that the retailer has registered as conducting business from a particular state or county because they:

Store Fronts

  • Have a physical location in the state
  • There are resident employees working in the state
  • The business has property (including intangible property) in the state
  • If there are employees who regularly solicit business in the state
For example, USA Cosmetics, an e-commerce website allows shoppers to calculate their sales tax depending on where they live:

USA Cosmetics Ready Artwork Client

Let’s say your business is registered in Los Angeles, and the NEXUS is 8.75%. So, in that case, you can charge your (seller’s) local tax rate even though you are selling to San Francisco.  The state only requires that you collect state tax rate (which is 7.75%), so at 8.75% you fulfilled state tax requirements.

Why Taxes Are Collected

The Marketplace Fairness Act was also introduced on February 14, 2013 and is currently pending in the United States Congress that would enable state governments to collect taxes from remote retailers with no physical presence in their state.

According to the marketplace fairness act website, the legislation should help businesses since it, in theory, will level the playing field for all businesses, from brick and mortar to e-commerce websites by eliminating the 5-10% price advantage for non-tax collecting businesses.

A website like Amazon saw this as a competitive advantage and fought to protect its customers from the sales tax. Unfortunately for them, Amazon will now collect sales tax from customers in 24 states as of early 2015.

That’s a little bit about how e-commerce websites calculate sales tax for online orders and why they are required to do so but it can all get a bit confusing, so be sure to consult with The California Board of Equalization!

Better to be safe than sorry! If you have any questions about getting your e-commerce website up and running with Magento, contact us today!