How to Set Up Marketplace Tax in the USA

Setting up marketplace tax in the United States can be a complex task due to the ever-changing and diverse state and local tax regulations.

With varying rules across states, online marketplace operators or businesses selling through third-party platforms need to be aware of their tax obligations. Failure to comply with state tax laws can lead to penalties and operational delays.

This guide provides a step-by-step approach to understanding and setting up sales tax for your marketplace.

It covers key concepts, the impact of tax, and how to ensure compliance across different jurisdictions. By following this guide, you can simplify tax collection, avoid costly mistakes, and keep your business on track.

Understanding Marketplace Tax

In the U.S., online marketplace tax obligations vary by state. Marketplace tax refers to the responsibility of collecting and remitting sales tax on goods and services sold through a platform.

This responsibility can either fall on the marketplace facilitator (like Amazon, Etsy, eBay) or individual sellers, depending on the laws in the state.

Why Is Marketplace Tax Important?

Proper tax collection is essential to ensure businesses remain compliant with state and local tax laws. Failing to properly collect and remit sales tax can lead to significant fines, penalties, and interest charges, which can seriously impact a business’s financial health.

As eCommerce has grown and online platforms have become more dominant, the need for clear, consistent sales tax regulations has become more critical.

In particular, the South Dakota v. Wayfair, Inc. decision in 2018 marked a pivotal shift, allowing states to require online sellers to collect and remit sales tax based on economic nexus—even if the seller has no physical presence in the state.

This ruling significantly expanded tax obligations for online businesses, creating a complex landscape where understanding and managing marketplace tax is vital for continued compliance.

With more states adopting their own versions of marketplace facilitator laws, which place the responsibility on platforms (like Amazon or eBay) to collect tax on behalf of their sellers, it is more important than ever for businesses operating in the eCommerce space to understand their tax obligations and how to efficiently navigate them.

Key Tax Terms and Concepts

Understanding the terminology surrounding taxes is essential when setting up marketplace tax. Here are some key terms:

• Sales Tax: A consumption tax imposed by the state or local government on the sale of goods and services. The tax is paid by the consumer but is collected by the seller.
• Marketplace Facilitator: A platform that facilitates transactions between buyers and sellers but is responsible for collecting and remitting sales tax on behalf of the sellers (e.g., Amazon, Etsy).
• Seller: In the context of marketplaces, a seller is anyone listing and selling goods or services through the marketplace.
• Economic Nexus: Refers to the tax obligation that arises when a seller meets certain sales thresholds in a state, even without a physical presence. The thresholds typically involve a minimum dollar amount in sales or number of transactions.
• Sales Tax Permits: Businesses must obtain these permits from the state’s tax authority before collecting sales tax. They authorize you to charge tax and remit it to the state.

Marketplace Facilitator Laws

Many states have enacted marketplace facilitator laws to simplify sales tax collection. These laws state that the marketplace itself, rather than individual sellers, is responsible for collecting and remitting sales tax on transactions that occur through its platform.

State-by-State Overview

• California: Marketplace facilitators must collect sales tax on all taxable transactions made through their platform, regardless of the seller’s location.
• Texas: Texas law requires facilitators to collect tax on the sale of taxable goods or services, with certain thresholds for small sellers.
• Florida: Similar to Texas, Florida requires marketplace facilitators to collect tax, but it applies to businesses with significant nexus, meaning a substantial amount of business conducted in the state.

Marketplace facilitator laws help simplify tax collection for sellers. If you sell through an online marketplace, this means that the platform is responsible for sales tax compliance, reducing the need for sellers to manage taxes across multiple states.

Setting Up Sales Tax Collection

For sellers using marketplace platforms like Shopify, WooCommerce, or any other platform, understanding how to set up tax collection is crucial.

Steps to Set Up Sales Tax Collection:

1. Register for Sales Tax Permits:
   • Before collecting sales tax, you need to register for a sales tax permit in the states where you have a tax obligation.
   • Visit each state’s department of revenue to apply for the permit. Many states allow you to register online.
2. Determine Taxability of Products:
   • Not all products are taxable in every state. For example, clothing might not be taxed in some states, while digital products or software could be taxed in others.
   • You should categorize your products correctly to ensure accurate tax calculation.
3. Use Marketplace Tools to Configure Sales Tax:
   • Platforms like Shopify or WooCommerce allow sellers to configure sales tax rates and set tax rules for different states and regions.
   • If you use a marketplace (like Amazon), tax collection is often handled automatically based on your settings, but check to ensure it is enabled.
4. Set Tax Rates According to State:
   • Sales tax rates differ by state and sometimes by city or county within a state. Tools like TaxJar, Avalara, and Vertex can automate tax rate calculations.
5. Automate Tax Filing:
   • Once tax is collected, ensure you’re filing it with the appropriate state authorities. Automated software can help with this process, making sure you meet deadlines and avoid penalties.

Economic Nexus and Its Implications

The concept of economic nexus arose from the South Dakota v. Wayfair Supreme Court case in 2018. Prior to this case, businesses were only required to collect sales tax in states where they had a physical presence. Now, businesses must collect sales tax if they meet certain thresholds set by each state.

What Triggers Economic Nexus?

Economic nexus laws vary by state, but the typical thresholds are:

• Sales revenue: If your sales in a state exceed a certain dollar amount (e.g., $100,000).
• Transaction count: If you have a certain number of transactions (e.g., 200 transactions per year).

If you meet these thresholds, you are required to collect and remit sales tax in that state, regardless of whether you have a physical presence there.

What Does This Mean for Marketplaces?

If you are selling via a marketplace, the platform may automatically calculate and collect tax for you. However, as an individual seller, you need to monitor your sales to ensure you are compliant with economic nexus laws in every state you sell in.

Setting Up Sales Tax for the USA Using WooCommerce

If you’re using WooCommerce for your marketplace, setting up tax collection in the U.S. involves a few steps:

• Enable Tax Settings: Go to your WordPress Admin Panel, then navigate to WooCommerce > Settings > General. Scroll down to the General Options section and check the box for Enable Taxes and Tax Calculations. Save changes.

• Set Tax Rates: After enabling taxes, go to WooCommerce > Settings > Tax. Here you’ll find various tax options:
  • Tax Classes: Create different tax classes (e.g., Standard, Reduced Rate) if needed.
  • Standard Rates: This is where you’ll input the sales tax rate for the different states. For each state, you’ll need to enter the state code (e.g., CA for California), the tax rate (e.g., 7.25%), and the country (e.g., US).

• Configure Shipping Tax: For shipping charges, go to Shipping Tax Classes and ensure the correct tax class is assigned. You can configure whether or not shipping should be taxed, based on your state’s tax rules.
• Set Up Tax Calculation: Go to WooCommerce > Settings > Tax. Here you can choose to round tax rates, display prices with or without tax, and more.
• Use Automated Tax Calculation Tools: Use tools like Avalara or TaxJar to automatically calculate taxes based on the customer’s shipping address, ensuring compliance with state laws. These tools integrate seamlessly with WooCommerce and can save you time.

This is how you can set up tax rates for the USA using WooCommerce.

Note: As Dokan is powered by WooCommerce, setting up Tax in WooCommerce will be supported by Dokan as well.

Tax Reporting and Remittance

After collecting tax from customers, you need to remit it to the state. Here’s how to handle reporting and remittance:

Steps for Sales Tax Reporting:

1. File Periodic Returns:
   • States require you to file sales tax returns on a monthly, quarterly, or annual basis, depending on the volume of sales.
   • Return filing is usually done online via the state’s tax authority website.
2. Remit Sales Tax:
   • Once your return is filed, you must remit the sales tax collected to the state. Automated tax tools can make this process faster and more accurate.
3. Maintain Accurate Records:
   • Keep detailed records of sales, tax collected, and remittances. States may audit your sales tax filings, and accurate records will make this process smoother.

Best Practices for Marketplace Tax Compliance

To ensure smooth and compliant operations, consider the following best practices:

1. Stay Updated on State Laws:
   • Sales tax laws change frequently, especially regarding nexus thresholds, taxability of goods, and marketplace facilitator rules. Stay informed to avoid compliance issues.
2. Use Automation Tools:
   • Automating tax collection and remittance can save you time and reduce errors. Platforms like TaxJar, Avalara, or TaxCloud can integrate with your marketplace to streamline this process.
3. Consult a Tax Professional:
   • Given the complexity of state tax laws, it’s advisable to work with a tax professional who understands sales tax compliance in the context of online marketplaces.

Stay Updated with the Latest Tax Rates in the USA!

Setting up marketplace tax in the USA can be overwhelming, but by understanding marketplace facilitator laws, economic nexus, and tax collection practices, you can simplify the process. Whether you’re a seller or a marketplace facilitator, the key is staying compliant, using automation tools, and regularly reviewing your tax obligations.

And one more thing on how to set up marketplace tax in the USA-

Make sure to keep updated on state laws, automate where possible, and consult with professionals to navigate this complex area.

With the right tools and knowledge, you can focus on growing your marketplace, knowing your tax obligations are in check.