What kinds of licenses do you need to run an online business? In this overview, The Ascent breaks down state licensing requirements and how they apply to your e-commerce business.
Whether you’re looking for vintage vinyl or a better way to handle your taxes, there’s a good chance you’ll shop for it online. The U.S. Census Bureau reports that more than $600 billion in goods were sold online in the U.S. in 2019, an increase of almost 15% over 2018, while traditional retail sales grew by only 3.4%.
With a wealth of great e-commerce platforms to choose from, online businesses present almost unlimited opportunities. Yet success with an online business goes way beyond setting up a great e-commerce website. It’s just as important to get every required business license for your online business.
Being properly licensed is critical to business development and growth because it reassures customers that your online business is legitimate and compliant with the law. Find out what you need to know to get a business license to sell online.
Overview: What is a business license?
Licenses and permits are different names for the same thing: permission from a government authority to own or do something, usually in exchange for a fee. Business licenses may also be called certificates or registrations.
Permits are generally narrower in scope than licenses, applying to a specific activity or event. Examples are elevator permits, special event permits, and food service permits.
Business license vs. seller’s permit: What’s the difference?
How can you tell if you need a seller’s permit vs business license? A seller’s permit is a specific type of business license required for businesses that sell goods or taxable services to a state’s residents. The seller’s permit registers your business to collect and remit state sales tax.
In some states, it is called a sales tax permit or sales and use tax permit. Some states provide temporary seller’s permits to cover specific time periods or events.
Traditionally, businesses registered for sales tax in states where they had a physical presence. With the growth of e-commerce, more and more sales transactions were left untaxed.
In 2018, the U.S. Supreme Court closed the gap in South Dakota v. Wayfair, ruling that sellers may be required to collect and remit sales tax in states where they have no physical presence.
In the wake of the decision, most states enacted specific requirements for online sellers. The laws provide exemptions for small businesses, however, which are outlined below.
What licenses and permits do you need to sell online?
Depending on your location and the nature of your work, you may need a mix of licenses and permits at the federal, state, county, and municipal levels to open and run an online business. These include registration for small business taxes.
Following are the main license types you’ll need to consider when operating an online business.
Alaska, Delaware, Montana, New Hampshire, and Oregon have no state sales tax, so you don’t need to worry about seller’s permits there. Among the 45 states with sales tax, all except Florida and Missouri now require online sellers to obtain a seller’s permit or sales and use tax permit.
In most of these states, however, the requirement applies to businesses with taxable sales of at least $100,000 or 200 transactions within the state. Outliers are Oklahoma, which has a threshold of just $10,000, and Kansas, which requires all remote sellers, from the first sale and the first dollar, to register.
In most cases, you can register for e-commerce sales tax online or through the mail for a low fee or no fee at all. Registration requires submitting an application to the state revenue department with basic information about your business such as federal tax identification numbers, office addresses, state of domicile, and revenues.
Once your application is approved, the state provides you with a state sales tax identification number. Many states have specific provisions for third-party sellers, also called “marketplace facilitators,” such as Etsy and Amazon.
Often, the marketplace facilitator bears the responsibility for collecting sales tax on behalf of the seller. If you sell through a third party, be sure to check each state’s provisions for marketplace facilitators.
The Streamlined Sales Tax Governing Board provides excellent resources on sales tax permits for online sellers, including a helpful guide to remote seller laws in every state. The board also provides a streamlined seller’s permit application covering 24 states.
If you buy materials or products for resale to your customers, you will also want to get a reseller’s permit, also called a resale certificate, to avoid paying sales tax on those purchases.
When making purchases for resale, you present your reseller’s permit to the vendor to allow a tax-free sale, and the vendor reports the sale to tax authorities. States issue reseller’s certificates to avoid taxing the same goods twice, so they may be used only for goods you plan to sell and charge sales tax on.
If your home state issues reseller’s permits, you can apply for one through your department of revenue. Some states do not issue a separate reseller’s permit, but rely on your sales tax identification number instead. Check your department of revenue website for application instructions.
Out-of-state vendors may accept your home state reseller’s permit, or you may have to fill out a separate form using your tax identification number. Alabama, California, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Washington, and the District of Columbia do not accept out-of-state resale certificates.
General business licenses
Your business may require one or more general business licenses in your home state. Alaska, Delaware, Nevada, Tennessee, and Washington issue statewide general business licenses. Many other states require licenses for specific types of businesses, although retail or online sales aren’t usually listed among them.
In addition, you may need business licenses at the county and local levels. For example, some municipalities require home-based businesses to get a home occupation permit or certificate of occupancy. Unfortunately, there are no uniform rules to rely on.
You’ll need to check with local, county, and state officials to determine the requirements for your business.
Most states have online licensing resources that make it easy to research the requirements that apply to your business and in most cases to apply for licenses online. To obtain a license, you’ll need to submit an application and a fee to the relevant licensing authority.
Employer licenses and permits
Sole proprietors with no employees who operate under their own names can use their Social Security number for tax identification purposes. For employment tax purposes, contract employees are generally not counted as employees.
All other businesses need a federal Employer Identification Number (EIN), which you can obtain online in minutes from the Internal Revenue Service. If you have employees, you will need to register for employer withholding tax in the jurisdictions where they work.
You may also need to register with the state unemployment department and workers’ compensation board, even if you don’t require workers’ compensation insurance.
Professional and industry licenses
Finally, your business may involve a regulated activity or product that requires licensing at one or more levels of government.
Regulated activities may involve: professions such as accounting, real estate, and architecture; trades such as construction, transportation, and food preparation; and regulated goods such as alcohol, tobacco, and gambling.
When evaluating your licensing needs, be sure to factor in any special licensing needs that might apply to your business.
Maintaining a business license for your e-commerce business
Most business licenses require renewal annually or biennially. You’ll also want to check licensing authority websites periodically for announcements concerning license requirements.
At least once a year, whether your licenses require renewal or not, you should check to ensure that your business still meets the qualifications for the licenses you hold.
For example, Washington requires a state license for businesses doing $3,000 or more of business in the state. If you don’t need the license initially, you may surpass the threshold later and need to apply.
Many state websites provide the opportunity to sign up for email notifications. Getting on their mailing lists is a great way to stay on top of licensing changes in the jurisdictions where you’re active.
Possibly. Some jurisdictions impose sales tax on services, while others do not. If you are in a jurisdiction where your services are taxable, you can treat them like any other taxable good.
Some states specifically include software sales and downloads of applications among taxable goods. The Washington Department of Revenue, for example, specifies that sales or use tax applies to “all digital products regardless of how they are accessed (downloaded, streamed, subscription service, networking, etc).”
Others are silent on the specifics. Check specific state laws to be sure, but it is generally safe to assume that for the purposes of licensing, a sale is a sale, including downloads and subscriptions to software services.
Whether your business is a sole proprietorship or LLC can affect your license requirements, Nevada, for example, provides a limited exemption from its state license requirement for sole proprietors operating out of their homes.
When investigating license requirements, look for specific stipulations that apply to your business type.
The benefits of licensure
This may seem like a lot of work, but licensing is just as fundamental to the success of your e-commerce business as product positioning and tracking the right e-commerce KPIs. License fees tend to be nominal, and operating without the required licenses can result in penalties and citations.
On the other hand, being fully licensed and having all of your certifications in order demonstrates your professionalism and prepares your business to get out there and grow.