When a Certified Public Accountant (CPA) told me that US sales tax is one of the most complicated sales tax systems in the world, I wasn’t surprised. US sales tax is complex for a lot of reasons. Rules and laws vary from jurisdiction to jurisdiction, and no two sellers’ sales tax life is the same. This post will attempt to demystify US sales tax by answering the top five US sales tax questions online sellers ask.
1. Will the IRS audit me if I don’t collect sales tax correctly?
We get this question from many new online sellers. They are accustomed to dealing with the Internal Revenue Service (IRS) when paying their own income tax. But the IRS – which is a federal tax authority – doesn’t have anything to do with US sales tax, because US sales tax is governed at the state level.
Forty-five US states and Washington D.C. all have a sales tax, and each state makes its own rules and laws when it comes to governing sales tax. This is why sales tax rates are different, why sales tax due dates fall on different days of the month, and why a product (like clothing) may be taxable in one state, but non-taxable in another state.
2. What products and services are taxable?
Traditionally in the US, most products are taxable, and most services are not. However, this is changing as the years pass.
As an online seller, you likely only have to worry about the taxability of certain products. For example, clothing is completely non-taxable in Pennsylvania, and clothing under $110 is non-taxable in New York. But clothing is completely taxable in states like California, Texas and Washington. You can see a state-by-state map of clothing taxability in the US here.
The same rule is true for groceries. Groceries are taxable in some states, taxed at a lower rate in some states, and not taxable at all in other states. You can see a state-by-state map of grocery taxability in the US here.
Fortunately, if you sell on Amazon, you are in luck. Amazon’s Product Tax Codes are a simple way to ensure that you collect the right amount of sales tax on all your products. Just be sure to enter the correct Product Tax Code in your Amazon sales tax settings and you’ll collect the right amount of sales tax from your customers.
3. From which customers do I need to collect sales tax?
In the US, retailers (and this designation includes online sellers) only have to collect sales tax from buyers I states where they have sales tax nexus. Each state sets their own rules and laws about what is considered nexus, but the following usually creates nexus:
- A location – including a home office, warehouse, store, or other physical place
- Personnel – including yourself, or an employee, contractor, salesperson, installer, etc.
- Inventory in a warehouse – having inventory for sales in a warehouse (such as an Amazon fulfillment center) creates sales tax nexus
- An affiliate – someone in a state who sends you online sales in exchange for a small percentage of the profits
- A drop shipping relationship – a 3rd party vendor who ships products to your customers sometimes creates sales tax nexus
- Temporary sales – making sales at a tradeshow, craft fair, antique show or other temporary stop
You can find out what every state says creates sales tax nexus here. If you do not have nexus in a state, no worries – you do not have to collect sales tax from buyers in that state. If you do have nexus in a state, your next step is to register for a sales tax permit with the state’s taxing authority.
4. How do I collect sales tax?
Once you have registered for your sales tax permit and have a sales tax number, your next step is to collect sales tax from your buyers. Fortunately, most online sales channels like Amazon, eBay and Etsy allow you to collect sales tax.
Since every online seller’s sales tax liability is different, it’s up to you to set up your online shopping cart or marketplace to collect sales tax on your behalf. You can find out how to set up sales tax collection on most major shopping carts and marketplaces here.
Here’s a video tutorial on how to set up sales tax collection through Amazon Seller Central:
5. How do I file a sales tax return?
Now you’ve obtained your state sales tax permit, started collecting sales tax, and see that your sales tax filing deadline is coming up. Most of the time the state will ask you to file either monthly, quarterly or annually. Be sure to pay attention to your due date! They vary from state to state, and states may even change your filing frequency from time to time.
You have several options to file your sales tax return:
- File by mail – this is the most time-consuming way to file, and may states are slowly phasing paper filing out
- File online – Login to your state’s department of revenue website and fill out your tax return forms yourself
- AutoFile – Starting in July, let TaxJar file your sales tax returns for you in every US state with a sales tax.
Always be sure to pay on time, because states will charge a fine if you’re late. This is true even if you don’t owe any sales tax, so be sure to file a return even if you were on hiatus or otherwise didn’t collect any sales tax over the taxable period.
What Online Sellers Need to Know about Sales Tax
It sometimes seems that as a business owner, you have just too much to do. Besides the enormous responsibility of strategy development and business growth, there is a sea of tax related tasks to slog through. Not only do you have to pay your income taxes on time, you are also responsible for collecting taxes from your customers remitting this to the relevant authorities. Welcome to the world of sales tax!
The state needs funds for various public projects, and taxes are one key way for the state to earn revenue. So your state relies on you, as a merchant, to collect sales taxes from the customers you sell your goods to, and remit the same back to the proper authorities in a timely manner. For online sellers, this task can be especially complicated.
Enter Online Selling and Sales Tax
Now that more merchants are making a living selling online, and strategies like third party fulfilment are helping sellers earn even more than before, merchants may find themselves responsible for collecting sales tax from buyers in more than one state. And yes, the onus is on you to collect the sales tax from your customers wherever they are, and remit this tax back to the respective state authorities. Failure to do so can result in penalties. The big question that you are probably now asking yourself is in which states you need to collect sales tax? This varies, but for the most part, you are required to collect and remit sales tax in states where you have a sales tax nexus.
What is Sales Tax Nexus?
Sales tax nexus is the single most critical factor that determines whether you are liable to collect sales tax in a state where you are selling to customers. You have nexus in a particular state, if the state deems that you have ‘significant presence’ there, based on certain criteria. And if you do have nexus, you have to collect sales tax in that state.
If you have no nexus in a state and you sell there, you don’t have to collect sales tax. But here’s the catch. The rules defining nexus and what constitutes ‘significant presence’ vary from state to state. It could range from having a physical presence – a store, an office, a warehouse – to having a representative or affiliate on your behalf or having attended a trade event or conference there. Having an employee travel to another state to solicit business there is also likely to create nexus. Nexus rules vary from state to state, so it is best that you check whether your presence qualifies as ‘nexus’ in a particular state to avoid penalty. Either approach the state’s taxing authorities or talk to an experienced tax professional, who will be able to help you out.
How Sales Tax Nexus Impacts You
Now this is where it gets really interesting. As an online seller, if you have opted for a system, where the online platform holds the inventory for you (think Fulfillment by Amazon), you are deemed to have a sales nexus in all states where your online partner has a warehouse that stocks your inventory. So it is highly likely that you will have a sales tax nexus (besides your own state) in all states where your inventory is stocked, and also states, where you may have attended a conference and met some prospective customers and so on. Can you imagine the implication? With each state having its own sales tax rates, most levying additional local taxes, and declaring different filing periods, it can be mind boggling to keep track of all the sales tax you have to collect and remit. Where then will you get time for all that business strategy and development?
Turn to your ecommerce platform for help. Most ecommerce platforms are equipped to figure in the sales tax calculation rates. However, you have to feed in the right data into the system, about which states to collect the taxes from. Make sure you have the right information about your sales tax nexus in the different states that you sell in.
And once you have the system in place for collecting sales tax, don’t forget to file your returns on time.
TaxJar is a service that makes sales tax reporting and filing simple for more than 8,000 online sellers. Try a 30-day-free trial today and eliminate sales tax compliance headaches from your life!