Sales Tax for Marketplaces: How It Works and How to Calculate It

Selling on marketplaces offers a global platform with access to millions of customers. However, managing sales tax can be challenging due to the various tax laws and regulations that vary from state to state in the United States. With the expansion of e-commerce, it is vital for sellers to understand how it applies to comply with all tax obligations.

In this article, we’ll explain how sales tax is calculated for marketplaces, what factors must be considered, and how sellers can ensure compliance with tax regulations.

What is Sales Tax?

Sales tax is a tax applied to the sale of goods and services. This tax is collected by the seller at the point of sale and remitted to state and local tax authorities. Each state in the United States has its own sales tax laws and rates, complicating compliance for sellers operating in multiple states.

What is a Marketplace Facilitator?

A marketplace facilitator is a platform that facilitates third-party sales through its website. Examples of marketplace facilitators include Amazon, Shopify, Walmart Marketplace, and others. These facilitators may be responsible for collecting and remitting sales tax on behalf of sellers, according to state regulations.

How is Sales Tax Calculated in Marketplaces?

Tax Nexus

Tax nexus is the sufficient connection that a seller must have with a state to be required to collect sales tax. This connection can be physical (e.g., having an office or employees in the state) or economic (exceeding a sales or transaction threshold in the state).

Economic Nexus Thresholds

Many states have implemented economic nexus thresholds that require sellers to collect sales tax if they exceed certain levels of sales or transactions in that state. These thresholds vary from state to state.

Examples of Thresholds:

• California: $500,000 in annual sales.
• Texas: $500,000 in annual sales.
• New York: $500,000 in annual sales and 100 or more separate transactions.

Role of the Marketplace Facilitator

In several states, marketplace facilitators are responsible for calculating, collecting, and remitting sales tax on behalf of sellers. This means that Amazon, eBay, and other facilitators automatically collect sales tax in the states where they are required to do so.

Sales Tax Calculation

Calculating sales tax involves several steps:

1. Determine the Sales Tax Rate: Identify the applicable sales tax rate at the buyer's location. This rate can include state, local, and district rates.
2. Apply the Rate to the Sale Price: Multiply the sales tax rate by the sale price of the product to determine the tax amount.
3. Collect the Sales Tax: Collect the sales tax from the buyer at the point of sale.
4. Remit the Sales Tax: Send the collected sales tax to state and local tax authorities within the established deadlines.

Example Calculation:

• Sale Price: $100
• Sales Tax Rate: 7% (includes state and local rates)
• Sales Tax Amount: $100 x 0.07 = $7
• Total Price to Customer: $107

How to Comply with Sales Tax in Marketplaces

Setting Up in the Marketplace

Sellers must configure their accounts in the marketplace to ensure sales tax is correctly collected. On platforms like Amazon, this may involve enabling automatic sales tax collection in the states where the marketplace facilitator is responsible.

Registering to Collect Sales Tax

If the marketplace is not responsible for collecting sales tax in certain states, sellers must register to collect sales tax in those states. This involves obtaining a sales tax permit and setting up tax collection in the marketplace account.

Monitoring and Review

It is essential to regularly review transactions and sales tax reports provided by the marketplace to ensure that sales tax is being applied correctly. Sellers should maintain detailed records of all sales and collected taxes.

Tools and Resources

Several marketplaces provide tools and resources to help sellers manage sales tax. These tools may include tax calculators, detailed reports, and configuration options in the seller dashboard.

How We Can Help

At Prodezk, we offer comprehensive accounting and tax compliance services to help you manage all your sales tax obligations related to marketplaces. Our experts can:

• Assist with Tax Registration: Help you register to collect sales tax in necessary states.
• Accounting Management: Keep your records organized and ensure tax compliance.
• Tax Advice: Provide guidance on tax obligations and how to maximize your tax benefits.

Calculating and complying with sales tax in marketplaces is crucial for sellers, especially when operating in multiple states. Understanding how sales tax applies, how to set it up in your marketplace account, and how to comply with tax regulations is essential to avoid penalties and maintain smooth operations.

If you have questions about sales tax in the United States, contact us and receive a free consultation with our expert accounting team.