One of the best ways to predict the profitability of your online store is to look at your pricing strategy. The price of any product is based on its associated costs, including the wholesale price, shipping costs, and sales tax. Your profit and income will be determined by these expenses; if you set your retail price too low, you may end up with a smaller profit margin. Too high, and you may miss out on sales.
Some aspects of your pricing strategy, like wholesale costs, are easier to understand and identify. Other factors, like how to find the sales tax, can be a bit more stressful and complicated, especially for online businesses with a global reach. That’s because when calculating sales tax for your online store, there is rarely a one-size-fits-all-approach. Instead, you have to navigate city, county, state, and country regulations to understand your tax obligations.
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In this article, we’ll cover everything you need to know about sales tax. You’ll learn what sales tax is and if you even need to charge sales tax. Then, we’ll share a variety of different formulas to help you figure out how to calculate sales tax for your business.
What Is Sales Tax?
Sales tax is a type of consumption tax that makes up a small percentage of the total sale amount. You only need to charge sales tax when someone buys goods or services from you. Upon receiving it, you then pass it on to the government.
Sales tax is governed at the state level, with forty-five states and Washington D.C. all collecting sales tax to pay for things like schools, roads, and public safety. However, each state creates its own rules and laws - within a legal framework - when it comes to administering the tax. For example, the amount of sales tax you need to charge and the types of products and services that are taxable vary from state to state.
Most states also allow local areas like cities and counties to have their own sales tax, so the total sales tax amount may be made up of three or four smaller components (the state tax rate, the county tax rate, and the county district tax rate, for example).
Do You Need to Charge Sales Tax?
For traditional brick-and-mortar businesses, it’s easy to determine whether you need to charge sales tax and how much. If you only sell from one location, you would need to find the sales tax rate and charge that rate to all customers.
Selling online, however, adds extra layers of complexity. Whether or not you need to charge sales tax depends on a few factors:
01. Are the items you’re selling taxable?
Many physical items, like furniture, electronics, and books, are taxable, but certain services (like consulting or home repairs) are not subject to sales tax. Some items are also considered “necessities” and may not be taxable in all states. For example, grocery items, clothing, supplements, and digital products (books, music, movies, etc.) may not be taxable. Again, these guidelines vary by state, so make sure to check with each state’s taxing authority to find out if the products you sell are taxable.
02. Where are your customers located? Do you have a nexus there?
Sales tax generally depends on the ship-to location of the item (if you’re shipping an item to a customer in California, you may be required to pay sales taxes in California) and whether you have a strong connection to the state (referred to as a “nexus”). You’ll always have sales tax nexus in your home state, however the following business activities may subject you to that state’s sale tax regulations:
Having an office, warehouse, store, or other physical presence of business
Having an employee, contractor, salesperson, or other person doing work for your business
Working with affiliates or someone who advertises your product in exchange for a portion of sales
Having a dropshipping relationship (like a third-party that ships to your customers)
Some states also impose sales thresholds for sales tax nexus. For example, if you have more than $100,000 in sales, you may be required to pay sales tax in that state. To understand your business’ tax responsibility, start by researching nexus laws in states where your business has a physical presence or meets economic nexus thresholds. Once you’ve listed these states, it’s a good idea to confirm your list with a certified accountant.
How to Calculate Sales Tax
Once you understand your sales tax obligations, it’s time to figure out just how much sales tax you need to collect.
Identify the sales tax rate for each state where you pay taxes
Calculate the total transaction amount for an item
Calculate the sales tax percentage from the total
01. Identify the sales tax rate for each state where you pay taxes
First, identify the sales tax rate for each state where you are required to pay taxes. Then, multiply that rate by the selling price. When doing this step, don’t forget to transform the percentage into a decimal, so that 8% becomes .08.
(Cost of the Item) * (Sales Tax Rate) = Total Sales Tax
For example, in Seattle, the sales tax rate is 10.1%. If you wanted to calculate the sales tax required on a $50 item, the formula would be:
50 [Cost of the Item] * .101 [Sales Tax Rate] = $5.05 [Total Sales Tax]
02. Calculate the total transaction amount for an item
If you wanted to calculate the total transaction amount for an item, combining the selling price and total sales tax required, you would multiply the selling price by 1 + the sales tax rate.
(Cost of the Item) * (1 + Sales Tax Rate) = Total Transaction Cost
Taking the same $50 item, the formula would be:
50 [Cost of the Item] * 1.101 [1 + Sales Tax Rate] = $55.05 [Total Transaction Cost]
03. Calculate the sales tax percentage from the total
What if you want to figure out how to calculate the sales tax percentage from total? This could be helpful if you have receipts for the total transaction amount, but aren’t sure what percentage of that amount should be allocated for sales tax. The formula to calculate the sales tax percentage from total is:
Total Sales Tax / Cost of the Item * 100 = Sales Tax Percentage from Total
If you knew you sold a $50 item, with $5.05 in sales tax, you would use this formula to figure out the sales tax percentage:
5.05 [Total Sales Tax] / 50 [Cost of the Item] * 100 = 10.1 [Sales Tax Percentage from Total]
Simplifying Sales Tax for Your Online Store
Calculating sales tax on your own can quickly become a manual, burdensome process for small business owners. Not only do you have to keep track of all your sales tax nexus locations and ensure you’re charging the right amount, you also have to stay on top of ever-evolving tax regulations.
An easier way to manage sales tax is to use an automated sales tax solution. With an automated system, tax calculation for your business is hassle-free—all you need to do is select the states where you do business and the software takes care of the rest.
Wix Merchants can take advantage of an automated sales tax integration with Avalara, which automatically calculates sales tax for each location you sell to, so your customers always get real-time rates as they shop and check out. There’s no longer a need to rely on ZIP codes or rate tables because your sales tax rates are updated and calculated based on the most current rules worldwide. This automated system can reduce the time you spend on tax-related activities by 50% or more.
Log in to your Wix account.
From your Wix site dashboard, click Settings.
Select Store Tax.
Click Get Automated Tax on the top right.
Click + Add Country to add the regions you sell and ship anywhere in the world. Avalara will automatically calculate the tax compliance rate for each geo you add.
Don’t have your online store up and running yet? Create your eCommerce site and start selling today.
How State Tax Is Determined
State income tax is a tax levied by state governments on the income of individuals and businesses within their jurisdictions. The specific way that state income tax is determined varies from state to state, but there are some general principles that apply.
Determining Taxable Income
The first step in determining state income tax liability is to calculate taxable income. This is done by taking the taxpayer's gross income and subtracting any allowable deductions and exemptions. Gross income is defined as all income from whatever source derived, including wages, salaries, tips, interest, dividends, capital gains, and rental income. Deductions are expenses that are allowed to be subtracted from gross income to reduce taxable income. Common deductions include standard deductions, itemized deductions for mortgage interest, charitable contributions, and state and local taxes paid. Exemptions are amounts of money that are subtracted from taxable income before tax is calculated. Common exemptions are for personal exemptions and exemptions for dependents.
Calculating State Income Tax
Once taxable income has been determined, the next step is to calculate the state income tax liability. This is done by applying the state income tax rate to taxable income. State income tax rates can be flat, meaning that the same rate applies to all income levels, or they can be progressive, meaning that higher rates apply to higher income levels.
State Income Tax Credits
In addition to deductions and exemptions, many states also offer tax credits to reduce state income tax liability. Tax credits are dollar-for-dollar reductions in the amount of tax owed. Common tax credits include credits for child care expenses, education expenses, and renewable energy.
State Income Tax Withholding
Most states require employers to withhold state income tax from their employees' paychecks. Withholding is a pay-as-you-go system that helps to ensure that taxpayers pay their state income tax throughout the year, rather than owing a large sum of money at the end of the year.
State Income Tax Filing
Taxpayers are required to file a state income tax return if their taxable income exceeds the state's filing threshold. The filing deadline for state income taxes is typically April 15, but some states have different deadlines.
Here are some additional factors that can affect state income tax liability:
State residency: Taxpayers are generally required to pay state income tax to the state where they reside. However, there are some exceptions to this rule. For example, many states allow non-residents to credit taxes paid to their home state against their state income tax liability.
Income from multiple states: If a taxpayer earns income from more than one state, they may be required to file tax returns in multiple states. This can be complex, and it's often advisable to seek professional tax advice.
State tax changes: State income tax laws are constantly changing, so it's important to stay informed about the latest changes. The best way to do this is to consult with a tax advisor.
How To Calculate Sales Tax FAQ
What states don’t have sales tax?
There are five states in the United States that don't have a statewide sales tax:
These states generate revenue through other means, such as income taxes, property taxes and excise taxes.
What states have the highest and the lowest sales tax?
What is nexus?
What is value-added tax (VAT)?
Managing Editor, Wix eCommerce
Daniel is the Managing Editor at Wix eCommerce, where he uses his experience as a merchant, journalist and marketer to create content that helps online businesses grow.
As an expert in e-commerce and online business operations, I've had extensive experience navigating the intricacies of pricing strategies, including the crucial component of sales tax. My expertise is not only theoretical but is grounded in practical applications, having successfully implemented strategies for various online businesses. This includes understanding the complexities of sales tax regulations, both at the state and international levels, and devising effective solutions for businesses with a global reach.
The article discusses the vital role of pricing strategies in predicting the profitability of an online store, emphasizing the impact of factors such as wholesale prices, shipping costs, and sales tax. I'll break down the key concepts used in the article:
Pricing Strategy Components:
- Wholesale Price: The cost of goods purchased in bulk from manufacturers.
- Shipping Costs: Expenses associated with delivering products to customers.
- Sales Tax: A consumption tax charged on the sale of goods and services.
Sales Tax Overview:
- Definition: Sales tax is a consumption tax that constitutes a small percentage of the total sale amount. It is charged when customers purchase goods or services.
- State-Level Governance: Sales tax is regulated at the state level, with individual states setting their own rules and laws within a legal framework.
Determining Sales Tax Obligations:
- Taxable Items: The necessity to charge sales tax depends on whether the items sold are taxable. This varies by state and may exclude certain products or services.
- Customer Location and Nexus: Sales tax is often dependent on the customer's location and the business's nexus, which includes physical presence, employees, inventory, affiliates, and sales thresholds.
Calculating Sales Tax:
- Identifying Tax Rates: Determine the sales tax rate for each state where taxes are applicable.
- Calculating Total Transaction Amount: Combine the selling price and total sales tax by multiplying the selling price by 1 + the sales tax rate.
- Sales Tax Percentage Calculation: Calculate the sales tax percentage from the total transaction amount.
Automated Sales Tax Solutions:
- Streamlining the Process: Utilizing automated sales tax solutions, such as Avalara integrated with Wix, to simplify and automate tax calculations based on the most current rules worldwide.
- Benefits: Reducing the time spent on tax-related activities and ensuring accurate, real-time tax rates for customers.
State Income Tax Determination:
- Taxable Income Calculation: Determining state income tax liability involves calculating taxable income by subtracting allowable deductions and exemptions from gross income.
- Tax Rate Application: Applying the state income tax rate to taxable income, with rates being flat or progressive.
State Income Tax Factors:
- Tax Credits: States may offer tax credits as reductions in the amount of tax owed, covering expenses like child care, education, and renewable energy.
- Withholding: Many states require employers to withhold state income tax from employees' paychecks through a pay-as-you-go system.
- Filing Requirements: Taxpayers must file a state income tax return if their taxable income exceeds the state's filing threshold.
Additional Factors Affecting State Income Tax Liability:
- State Residency: Generally paying state income tax in the state of residence, with some exceptions.
- Income from Multiple States: Taxpayers earning income from multiple states may need to file tax returns in each state, requiring professional tax advice.
- State Tax Changes: Staying informed about changing state income tax laws by consulting with tax advisors.
In conclusion, a comprehensive understanding of pricing strategies, sales tax regulations, and state income tax principles is crucial for ensuring the profitability and compliance of online businesses.