Determining, calculating, and collecting sales tax on individual products is crucial for an eCommerce business owner to avoid legal penalties and effectively operate an online marketplace. Every state/country imposes separate tax charges on the sale or purchase of products in the region. For instance, in Colorado, each transaction on Amazon.com includes a 2.9% sales tax fee while in Illinois, a 6.25% base tax rate + city tax is levied on similar purchases.
For an online business to successfully penetrate the market across borders, incorporating taxes on individual products in the marketplace becomes fairly crucial. There are two commonly adopted tax structures in eCommerce business:
Sales Tax rates vary from state to state (county to county), especially in countries like the USA, where the states may charge taxes on purchases of goods from vendors with or without a physical presence in the state, according to the US supreme court decision on South Dakota v. Wayfair Inc. case.
The judgment made by the Supreme Court (on June 21, 2018) overturned the longstanding decision in Quill Corp. v. North Dakota (1992) case that barred states from collecting taxes on sales made by retailers without any physical presence in the taxing state. Since the Wayfair decision, the majority of US states have defined new rules on sales and tax obligations (known as nexus). And unfortunately for eCommerce retailers, no two states have the same sales tax nexus.
Here is a breakdown of the sales tax rates in 50 US states for which both TaxJar and Avalara API offer apt compliance solutions.
Sales Taxes in the US
Ensuring sales tax compliance in different states is a complicated yet crucial step for an eCommerce seller to streamline operations. There are several compliance challenges that a business must consider when creating an online sales strategy. Below we have listed some of the most notable challenges:
According to a report by Vertex, a total of 592 standard sales tax rate updates were recorded in 2020, taking the combined average sales tax rate across the US to reach a 10-year high. In total, there are over 13,000 tax jurisdictions with multiple jurisdictions applicable even within the same zip code in the US. So, sellers relying upon tax rate tables (based upon zip codes) could be charging incorrect tax rates on products unknowingly, since these tables tend to list the highest possible tax rate for a given zip code.
The ability to determine which items are taxable and which aren’t is a big help during sales tax compliance. From shipment handling to exempt sales, there are several areas where inaccurate product taxability might hamper an eCommerce business. Since tax compliance varies greatly in states as well as internationally, identifying correct rates prevents a business from under/overcharging customers.
Returns are an equally important process of the entire supply chain logistics. For eCommerce businesses to operate effectively and boost consumer satisfaction, streamlining returns is a must. Processing and refunding the correct sales tax amount helps keep your business in compliance.
Yo!Kart is certainly among the leading multi-vendor eCommerce platforms. It comes with an in-built tax management module that empowers business owners to define the tax structure and rate on individual product categories.
Single and Combined Tax Structure
Prior to the latest release of Yo!Kart, sales tax for individual product categories could only be entered manually by the admin in a Yo!Kart-powered marketplace. To ensure hassle-free sales tax calculations and streamline tax management in eCommerce marketplaces, the team has integrated the powerful tax service APIs – TaxJar and Avalara in Yo!Kart V9.3.0. This ensures that your business isn’t falling behind on taxes.
To automate sales tax compliance in Yo!Kart, the admin needs to activate either of the two pre-integrated tax service APIs. Go to Tax Services under System Settings -> Plugins in the admin dashboard to enable the service.
Once activated, the sales tax process in Yo!Kart works this way:
The admin can also use the in-built tax management module (in case neither of the APIs is enabled) to enter tax categories or set/change tax rates manually. This ensures streamlined marketplace operations while incorporating sales tax compliance effectively.
For complete working of the sales tax process, check out our admin manual.
Q1. What is tax automation?
– Utilizing software solutions to ensure compliance with critical tax processes and automate decisions on tax transactions is termed as tax automation. It helps businesses automatically cover different tax regulations in various states/regions around the world with improved accuracy and overall efficiency. Tax automation is an instrumental part of e-commerce businesses looking to sustain and scale their business.
Q2. How do taxes work with eCommerce?
– For each state/country, sales tax may vary for all transactions (including e-commerce) that occur in the region. These taxes are added to the individual sales transaction and collected by the admin that pays these taxes to the government. Since there are separate taxes for every state and region, e-commerce businesses use tax management services to automate tax compliance.
Q3. What are TaxJar and Avalara used for?
– TaxJar and Avalara are two prominent tax service integrations that automate sales tax compliance for businesses such as an online marketplace. They deliver extensive, accurate, and real-time automated tax compliance solutions. Both Taxjar and Avalara APIs come pre-integrated in Yo!Kart to streamline tax management for marketplace operations.
Q4. Who uses TaxJar and Avalara API Integrations?
-Online marketplaces and e-commerce stores with businesses in multiple states as well as globally, require the use of TaxJar and Avalara API integration. This saves them considerable business hours that can be used to run, manage, and scale their operations.
Q5. How do you integrate TaxJar and Avalara in Online Marketplaces?
-Integrating TaxJar and Avalara APIs in online marketplaces depends upon their infrastructure and scalability. Yo!Kart, on the other hand, delivers a ready-made marketplace with TaxJar and Avalara APIs pre-integrated. To check/configure these tax service APIs in Yo!Kart, go to System Settings > Plugins > Tax Services in the admin demo.