Sales Tax 101 for Small Business Owners

As a small business owner, one tax type you need to pay close attention to is sales tax. Unlike income taxes, which are based on your net total profits, sales taxes are based on the actual transactions your business makes. For ecommerce businesses, properly charging and collecting sales tax is vital. Get sales tax wrong and you could face penalties or audits down the road.

This sales tax guide will walk you through the basics you need to know, from understanding your nexus tax contributions to using the right tools to simplify compliance. 

Note: This Making It article was created in collaboration with Amaka. It is not meant to be construed as professional financial or legal advice. Refer to local regulations and a financial professional to understand your obligations.

Do you need to collect sales tax for your small business?

The short answer is, yes. You will need to charge sales tax if you sell products or services. This applies whether you have a brick-and-mortar business, an online shop, or both. You still need to collect sales tax for selling online.

But how you go about collecting sales tax differs by country, state, and province. We’ll go into more depth on sales tax legislation across different regions below. However, make sure to work with a tax and accounting professional to get answers to any specific questions for your business and locale.

Sales tax implications for selling across regions

When selling online across borders, sales tax obligations get complicated quickly. It’s important to understand value-added tax (VAT) rules in Europe and goods and services tax (GST) guidelines covering Canada, Australia, and more to charge international customers appropriate taxes at checkout. It’s also important to understand U.S. taxes, including sales tax nexus, which differ from state to state.

As an online seller, you are generally responsible for registering for tax collection, filing returns, and tax remittance in every country where you pass local sales tax thresholds. Tax rate rules for digital, physical, and service goods all vary. That’s why getting a clear understanding on which countries will tax your online sales is critical before expanding globally. 

We recommend businesses of all sizes to engage with a tax accountant to ensure you meet compliance standards.

Understanding U.S. nexus laws

When selling in the U.S., there are unique sales tax rules you will need to follow based on the state you operate from and sell to. Having a significant economic presence in a state makes it a tax nexus for your business, meaning you need to register and collect sales tax in that state. 

For instance, if your business is based in California and you sell to California residents, you have a tax nexus there and must collect California sales taxes. If you have a business based solely in Oregon, a state with no required sales tax, no sales tax collection is necessary. But if your Oregon business has inventory or employees located in another state where you make sales, you would also need to pay taxes in that state. 

If you only sell in states where you don't have physical presence, you may not need to collect sales tax depending on that state's economic nexus laws. Different states have different thresholds where businesses qualify for a tax nexus, typically depending on number of transactions or total sales.

How to set up sales taxes with Squarespace Commerce

Squarespace Commerce has specific tools and settings to help you manage your sales tax. On Squarespace, you can manually set tax rates for the different countries or states you ship to and set your product prices to include taxes instead of adding them at checkout. 

This process allows you to charge tax for a product based on the location of a shopper’s shipping address (for physical products) or billing address (for digital products). For U.S. and Canadian sales taxes specifically, you can choose the state or province and zip code for the region you’re selling to, then the tax rate to ensure it’s charged correctly. 

If you’re selling in the U.S., you can use the TaxJar extension to help you to automate setting up and collecting sales tax for your Squarespace store at checkout. It allows you to charge different tax rates based on the tax category of your product. TaxJar also has features that can help you automatically file your state sales taxes. This helps you streamline your sales tax and tax filing and helps you to avoid errors in your taxes.

For sellers in the E.U. and Australia, setting up sales tax to collect VAT and GST is a simple process. The Squarespace platform allows you to set up tax rates, enable tax inclusive pricing, and customize price and tax details. You can also offer customers the opportunity to check out using payment processors, such as PayPal and Stripe. Offering these options caters to customers internationally who may prefer these processors over other checkout options.

How to prepare for tax time

There are a few simple things you can do to prepare for tax time as a small business owner. Depending on your location and the tax laws where you do business, you may need to file tax returns more than once per year. Make sure you work with a tax professional to understand the requirements for your business. 

Consistently tracking income and expenses is key for your general business finances, and a great way to ensure you’re ready for tax season. The best way to maintain accurate records of your sales and payments data is by integrating Squarespace with accounting software, like the Amaka extensions, Xero and MYOB.

Amaka’s accounting integrations keep your Squarespace sales data up-to-date and accurate. You can sync all transaction types and sales tax types on a daily basis. This is important when discrepancies can result in tax fines and other compliance issues. 

Accounting software can help you track expenses and manage your cash flow overall. With your important expense data stored in one reliable location, you’ll be able to remain organized and compliant ahead of tax time.