U.S. sales tax, demystified
Editor’s note: This is a guest blog by TaxJar, a company that helps eCommerce merchants manage the sales tax system.
When a tax attorney once told us that the U.S. was right up there with Brazil and India as the three countries with the most complicated sales tax in the world, we weren’t surprised.
Due to the structure of the U.S. government and a delay in laws catching up with technology, U.S. sales tax can present a quagmire for international sellers when first selling into the U.S. This blog post will demystify U.S. sales tax for non-U.S. sellers and start you down the path to sales tax compliance in the U.S.
The U.S. sales tax structure
There is no national sales tax in the U.S. Instead, sales tax is governed at the state level. Forty-five states and Washington D.C (the nation’s capital, which isn’t technically a state) all have a sales tax. States are allowed to, within the framework of the U.S. Constitution, set their own sales tax rates, rules and laws. This means that sales tax can be quite different from state to state.
For example, clothing is non-taxable in Pennsylvania, but taxable in California. As another example, sales tax is due on the 20th of the month after the taxable period in many states, but on the 30th of the month in other states. These are just two examples of the many disparate sales tax laws in the U. S.
In the U.S., sales tax is a “pass through tax.” Retailers (including online sellers) collect sales tax from buyers and then remit that amount to the state government when filing a sales tax return.
Below we’ll answer some of the most common questions regarding U.S. sales tax.
Who needs to collect U.S. sales tax?
In the U.S., whether or not you are required to charge sales tax to your customers has nothing to do with where you live. Any retailer – based in the U.S. or abroad – is required to collect sales tax from buyers in a state if the retailer has “sales tax nexus” in that state.
Though sales tax laws vary from state to state, sales tax nexus is just a fancy way of saying “a significant presence in a state.” If a retailer has a significant presence in a state, and sells taxable items to buyers in that state, then s/he is required to collect sales tax from buyers in that state.
Every state’s definition of nexus can be slightly different, but for the most part, these factors create sales tax nexus:
- A location – A store, office, warehouse, factory, sample room or other location creates sales tax nexus
- Personnel – An employee, contractor, sales person, installer, etc. generally creates sales tax nexus
- Inventory – storing inventory in a state generally creates sales tax nexus
- Dropshipping – A dropshipping relationship might create sales tax nexus (whether or not it does depends on the tax liability of both you and the drop shipper you are using)
- Affiliates – If an affiliate sends you sales in exchange for a percentage of the profits, then you have sales tax nexus in some states if you reach a certain threshold of sales in those states
- Trade shows, craft fairs, etc. – Make sales in a state, even temporarily such as at a trade show or other event, sometimes creates sales tax in that state if certain conditions are met
If you have questions about whether your activities create sales tax nexus here are a few resources:
How to get started collecting sales tax
Once you’ve determined if you have sales tax nexus in a U.S. state, your next step is to register for a sales tax permit in that state. It’s important to register for your sales tax permit (sometimes called a “seller’s permit” or “sales tax license”) before you begin collecting sales tax from your buyers. States consider it illegal to collect sales tax in their name without your sales tax permit. Here’s a list of how to register for a sales tax permit in every U.S. state.
As a non-U.S. seller, you may be required to have a registered agent in the U.S. before you can file for a sales tax permit. In addition, keep in mind that most states require permit-holders to pay sales tax with a U.S. bank account.
When you receive your sales tax permit, your state will also tell you when they want you to file sales tax returns. You’ll generally file either every month, every quarter or every year. As a rule of thumb, the more revenue you make in a state, the more often you will be assigned to file sales tax.
How to collect sales tax on online sales
Once you have your sales tax permit in hand, it’s time to start collecting sales tax from buyers in the state(s) where you have sale tax nexus.
Luckily, most online sales channels have automatic sales tax collection. You do, however, have to let each marketplace know in which states you want to collect sales tax. Some states want you to collect sales tax on shipping charges, too.
This link has guides to setting up sales tax collection on the most popular online sales channels. And this link will guide you on whether or not your nexus state(s) wants you to charge sales tax on shipping charges to your customers.
To sum it up, it doesn’t matter if you live in the next state over or halfway around the world, if you have sales tax nexus in a state, the state government requires that you collect sales tax from buyers in that state.
Reporting and filing sales tax
When your sales tax filing due date rolls around, your next step is to report how much sales tax you’ve collected from buyers in your nexus state(s).
This sounds deceptively simple. The vast majority of states want you to report not only how much sales tax you collected from buyers within the state, but they want you to break that amount down by individual city, county and special taxing district. States can have hundreds of cities, counties and special taxing districts, not to mention it isn’t readily apparent which county each city lies in.
Further, if you sell on multiple channels, you are required to try and combine your sales tax reports in order to file a single sales tax return. This can be a huge headache for even the most patient online seller!
That’s where sales tax automation comes in. A solution like TaxJar will connect to all the online channels on which you sell, then slice and dice your information just the way your state(s) wants to see it. From there, it’s simple to fill out your state sales tax filing yourself. Or, if you never want to deal with another U.S. sales tax filing again, you can AutoFile your sales tax returns.
Sales tax automation takes the hassle out of dealing with complex U.S. sales tax returns.
There are a couple more important things to remember when filing U.S. sales tax returns:
- Always file a “zero return” – This means file a sales tax return by every state-assigned due date, even if you didn’t make any sales in that state during the taxable period. States consider sales tax filings to be a “check-in” and may levy a monetary penalty or even cancel your sales tax permit if you forget to file.
- Don’t discount sales tax discounts – About half the U.S. states understand that they are asking a lot of retailers when asking them to collect sales tax on the state’s behalf. For this reason, many states will allow you to keep a small percentage of the sales tax collected if you file and pay sales tax on-time. Don’t leave this free money on the table!
I hope this guide has helped demystify U.S. sales tax. For a whole lot more on U.S. sales tax, check out our free Sales Tax 101 for Online Sellers guide.
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 of TaxJar today and eliminate sales tax compliance headaches from your life! Use code PAYONEER for an additional 10% off a TaxJar annual plan.