Note: This is a guest post from our friends at TaxJar.
Sales tax is a necessary part of essentially every eCommerce business. But that doesn’t mean that it’s fun to deal with.
Sales tax isn’t fun because it’s confusing, ever changing and the rules are full of legalese. I hope this post will untangle some of that confusion for small business owners.
One of the reasons sales tax is so confusing is because there isn’t just one national “sales tax.” Forty-five U.S. states (and D.C.) all have a sales tax, and sales tax is governed at the state level. This means each state can make their own rules and laws about sales tax, and these regulations vary wildly. Everything from which products are taxable to the sales tax rate is different from state to state.
States use the money they collect from sales tax to pay for budget items like schools, roads and public safety, so they’re very invested in making sure that eCommerce sellers collect sales tax from buyers!
Speaking of sales tax rates, these can vary from state to state and even from city to city.
States have a statewide sales tax rate. But most states then allow local areas like counties, cities and other special taxing districts to add on an additional sales tax rate. All the different localities in the state use sales tax to fund their budgets.
Different sales tax rates in different localities are why the sale tax rate in one city is 6.15% while the sales tax rate in the next city 10 miles north is 8.75%.
States are allowed to make their own rules about which items are taxable. Most of the time “tangible personal property” is taxable, but some states make exceptions. For example, groceries are tax-exempt in a majority of states, and textbooks are tax-exempt in some states.
Services are usually not taxable, though states – who are hurting for revenue – are increasingly looking at ways to require sales tax on services as well.
As an online seller, you may sell to customers all over the U.S. and the world. But in the U.S., you are only required to collect sales tax from buyers in states where you have sales tax nexus.
Though each state is slightly different, a few factors generally create nexus:
You run your business in a state – You’ll always have home state nexus in states where you run your business, even if you work from your garage
A location – offices, stores, warehouses and other physical locations create nexus
Personnel – employees, salespeople, installers and even some independent contractors can create nexus
A drop shipping relationship – If you have a supplier ship products to your customer, you may create sales tax nexus
An affiliate – In many states, an affiliate who sends sales to your store in exchange for a cut of the profits creates nexus
Temporary business – Making sales temporarily, such as at a trade show or craft fair, creates nexus in some states
If you have nexus in a state, and sell taxable items to buyers in that state, then you are required to collect sales tax from those buyers.
If you have nexus in a state, you’re required to collect sales tax from buyers in that state. But you shouldn’t collect until you’ve registered for a sales tax permit. Most states consider it unlawful to collect sales tax without a permit. (Even if you have the best of intentions, states see collecting with no active permit as you collecting money fraudulently to keep in your pocket!)
Speaking of collecting sales tax, eCommerce sellers are required to collect sales tax from customers but sadly, you don’t get to keep it. Instead, it “passes through” your business and is remitted to the state. You are basically acting as a state’s tax collector.
That said, about half the states understand that they’re asking you to do hard work on their behalf. In these states, you’ll get to keep 1-2% of the sales tax you collect as a sales tax discount.
I hope these sales tax basics have demystified this necessary business process for you. For more about sales tax, including how you should go about registering, collecting and filing, check out our Sales Tax 101 for Online Sellers guide.
Jennifer Dunn is Chief of Content at TaxJar, a service that makes sales tax collection, reporting and filing simple for more than 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!