Our Friends over at TaxJar have recently put together a useful guide to help eCommerce business owners navigate the ever-complex spider web on sales tax regulations. With sales tax, getting started is the hardest part. And one reason that can be so tough is because sales tax laws and rules can be confusing. These 10 sales tax facts should help demystify sales tax so you can get back to the fun part of running your business!
1.) Sales tax is governed at the state level
There is no “federal” sales tax. Instead, sales tax is governed by each state’s taxing authority (this is usually called the “[State] Department of Revenue” but sometimes goes by other names.) Laws, rules and regulations can vary from state to state.
2.) You only need to charge sales tax in states where you have “nexus”
Sales tax nexus simply means a “significant presence” in a state. Due to a Supreme Court ruling in Quill v. North Dakota, retailers only need to charge sales tax in states where they have nexus. Common factors that create nexus include a location, personnel, drop shipping, selling at a tradeshow, or storing inventory for sale in a state. You can find out more about what creates nexus here.
3.) Register for a sales tax permit before collecting sales tax
If you have nexus in a state, you should register for a sales tax permit before you begin collecting sales tax in a state. In fact, states consider it unlawful to collect sales tax without a permit! In their suspicious minds, if you collect sales tax without a permit you might just keep the extra few cents on the dollar in your pocket!
4.) Some items are not taxable
For the most part, if you sell “tangible personal property” you should charge sales tax to your customers when you sell it. But some states make exceptions for certain types of items. You might find that in one state clothing is tax exempt, while in another state groceries are tax exempt. And some items may not be tax exempt, but merely taxed at a lower rate. You can find out from your state which items they consider tax exempt or differently taxed.
5.) Sales tax rates vary
As a consumer, you’ve probably noticed that you pay different amounts of sales tax depending on where you make a purchase. Some states only have one statewide rate, while most others may allow local areas to also require sales tax. When you are charging sales tax, you may be required to charge a state rate + county + city + special taxing district rate. To look up a sales tax rate at a certain location, check out this sales tax calculator.
6.) Some states are “origin-based” while others are “destination-based”
How much you, as an online seller, charge buyers in your home state depends on if you live in an origin-based or a destination-based sales tax state. In origin-based states, you charge sales tax at your location (your home or warehouse – wherever the order “originates.”) But most states are destination-based, meaning that you are required to charge sales tax based on your buyer’s ship to location. This can make matters complicated! Read more about how much sales tax to charge your customers here.
7.) Collect sales tax in all of your nexus states on all of your shopping carts and marketplaces
One of the biggest sales tax mistakes we see at TaxJar is seller’s forgetting to collect sales tax in all of their nexus states on all of their platforms and shopping carts. If you have nexus in a state, you are required to collect sales tax on every sale in that state.
8.) Your sales tax filing frequency depends on your sales volume
As a general rule, the more sales volume you have in a state, the more often that state will want you to file a sales tax return. Most states will assign you either a monthly, quarterly or annual filing frequency.
9.) Sales tax due dates vary
Because sales tax is governed at the state level, the actual day of the month that states want to hear from you can differ from state to state. Most states want you to file on the 20th day of the month after the taxable period, but other states want to hear from you on the 15th, the 25th or the last day of the month. You can check your state’s sales tax due dates for July 2016 here.
10.) Always file “zero returns”
If you are registered for a sales tax permit in a state, you should always file a sales tax return by your due date even if you didn’t collect any sales tax. States consider filing these “zero returns” to be you checking in, and if you fail to file the consequences can include everything from a $50 fine to the cancellation of your sales tax permit. And nobody wants to pay a fine when you didn’t owe any sales tax in the first place!
I hope these 10 sales tax facts have helped you demystify the sales tax process. For a whole lot more about sales tax, check out our Sales Tax 101 for Online Sellers guide or join us at the Sales Tax for eCommerce Sellers Facebook group!
TaxJar is a service that makes sales tax reporting and filing simple for over 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!