Sales tax can be one of the more confusing and complicated regulatory aspects of running your business. We run into myths and misconception about sales tax daily at TaxJar.
But if you wrap your mind around these general sales tax concepts, you’ll be prepared to face sales tax challenges as they come!
Forty-five U.S. states and Washington D.C. all have a sales tax, and the individual states make their own sales tax rules and laws.
There’s currently no “federal” sales tax, and the IRS has nothing to do with sales tax.
Since states can make their own rules, everything from which products are tax exempt to which day of the month you file sales tax can be different from state to state.
You—as the seller—are required to collect sales tax from customers, but you don’t get to keep it. Instead, you pass it on to the state periodically.
As an online seller, you’re not required to collect sales tax from every buyer. You’re only required to collect sales tax in states where you have sales tax nexus.
Nexus simply means a “significant connection” to a state.
The most common factors that cause nexus are a location, personnel, or inventory in a state.
If you have a drop shipping relationship with a vendor, a 3rd party affiliate, or attend a tradeshow in a state, you might have nexus there, too.
Check here for a list of what creates sales tax nexus in every state.
States consider it unlawful to collect sales tax without being registered for a sales tax permit.
You can register at your state’s taxing authority—usually called the Department of Revenue.
Here’s a list of how to register for a sales tax permit in every state.
Sales tax permits not only ensure you are legal to collect sales tax from buyers in your nexus states, you can also use your sales tax registration number to buy items tax free for resale.
Some states are “origin-based” sales tax states, where you collect sales tax at the sales tax rate at your place of business.
Most states, though, are “destination-based” sales tax states, meaning that—if you’re shipping an item to a customer—you charge sales tax based at your customer’s ship to address.
To make matters even more complicated, if you’re considered a “remote seller”—a seller based out of state—and have nexus in an origin-based sales tax state, you should still collect sales tax at your buyer’s ship to location.
Here’s a more in-depth post about how much sales tax to charge your customers.
The more revenue you make in a state, the more often that state will generally want you to file a sales tax return.
High volume sellers are generally required to file weekly, while small sellers may only be asked to file monthly. Other sellers might be asked to file quarterly.
Most states want you—the seller—to break down how much sales tax you collected from buyers not just in the state, but within each county, city, and special taxing district.
If you’re an eCommerce seller, especially if you make more than a few sales per month or sell on multiple channels, this can be a huge chore.
(Psst! That’s why we created TaxJar Reports.)
Always file, even if you didn’t collect a single cent in sales tax.
States want all registered sellers to “check in” even if you don’t have any sales tax to remit.
Failing to file can result in anything from a $50 penalty to the revocation of your sales tax permit.
Some states understand that collecting and remitting sales tax places a substantial burden on a seller, and they’ll let you keep a small percentage—usually 1-3%—of the sales tax you’ve collected if you pay on time.
Check out this list of states that offer a sales tax discount and don’t leave money on the table!
Last but not least, we talk to many sellers who get intimidated by the thought of registering for a sales tax license and collecting…
Once you get the hang of sales tax—and with a sales tax automation solution to do the heavy lifting—it will be as simple as any other administrative task you handle with ease in your business.