Before You Start

This guide assumes you have active e-commerce stores (e.g., Shopify, Amazon) and access to your accounting software (QuickBooks/Xero) with administrative privileges.

Overview

40 min
Setup Time
Advanced
Difficulty
Monthly
Maintenance

What You’ll Learn

  • How to understand and determine sales tax nexus
  • Setting up automated sales tax calculation services (TaxJar, Avalara)
  • Configuring e-commerce platforms (Shopify, Amazon) for tax collection
  • Reconciling collected sales tax and filing reports

1. Understanding Sales Tax Nexus

Sales tax nexus determines where you’re legally obligated to collect sales tax. It’s crucial for multi-state e-commerce businesses.

Key Nexus Triggers

  • Physical Presence (Office, Warehouse, Employees)
  • Economic Nexus (Sales volume or transaction count thresholds)
  • Affiliate Nexus (Partners in a state)
  • Click-Through Nexus (Referrals from in-state websites)

Important Considerations

  • Each state has unique rules and thresholds
  • Marketplace Facilitator laws affect platforms like Amazon
  • Remote seller laws impact businesses without physical presence

2. Choosing Your Sales Tax Automation Partner

You have several options for automating sales tax, each with distinct features.

Option A: TaxJar

A popular choice known for its ease of use.

Pros:
  • User-friendly interface.
  • Strong integrations with popular platforms.
  • Affordable for small to medium businesses.
Cons:
  • May lack some advanced enterprise features.
  • Customization options can be limited.
  • Less robust for highly complex scenarios.

Option B: Avalara

A powerful, enterprise-grade solution for complex tax needs.

Pros:
  • Comprehensive, global tax compliance.
  • Extensive integrations and API capabilities.
  • Highly customizable for unique business rules.
Cons:
  • Higher cost, especially for smaller businesses.
  • Steeper learning curve due to feature depth.
  • Implementation can be more involved.

Expert Tip: We strongly recommend choosing a solution based on your business volume, complexity, and growth projections. For most SMBs, TaxJar is an excellent starting point, while growing enterprises might find Avalara more suited for long-term needs.

3. Step-by-Step: Setting Up TaxJar/Avalara

Automating sales tax involves connecting your e-commerce platforms and accounting software to your chosen tax service.

Here is a sample code block to show how a tax rate query might look.

{
  "to_country": "US",
  "to_state": "CA",
  "to_zip": "90210",
  "from_country": "US",
  "from_state": "NY",
  "from_zip": "10001",
  "amount": 100.00,
  "shipping": 5.00
}

4. Configuring E-commerce Platforms

  1. 1

    Connect Tax Service to Shopify/Amazon

    Install the appropriate app or connector (e.g., TaxJar for Shopify) and grant necessary permissions. Follow the service’s specific instructions for your platform.

  2. 2

    Configure Tax Settings in Platform

    Disable your platform’s built-in tax calculation to prevent conflicts. Ensure products are correctly categorized for taxability (e.g., taxable, non-taxable, digital goods).

  3. 3

    Update Nexus Settings in Tax Service

    Within your tax automation service (TaxJar/Avalara), accurately declare all states where you have nexus. This ensures correct tax collection based on your business footprint.

Common Error: Incorrect Product Taxability

Ensure all products have correct taxability codes assigned. Misclassifying products (e.g., exempt items as taxable) can lead to under or over-collection of tax, resulting in compliance issues.

5. Reconciling and Filing

Monthly Compliance Checklist

  • Review monthly sales tax reports from your automation service
  • Reconcile collected taxes with your accounting software data
  • Generate state-specific tax returns via your service
  • Submit filings and remit payments by their respective due dates

Need Help?

Get Expert Tax Compliance Help

Navigating multi-state sales tax can be complex and time-consuming. Our experts can help you ensure full compliance and set up robust automation tailored to your business.

Contact Us