What Is Sales Tax?
Sales tax is a consumption tax as it is only charged when a buyer buys goods or services, and it is a pass-through tax because even though a merchant charges sales tax to her buyer, she will need to remit it to the state government.
In the US, all 45 states and District of Columbia have sales tax law, and each state makes its own rules and laws when it comes to administering sales tax.
Some aspects of sales tax that can vary from state to state include:
- Which products and services are taxable: Certain products such as food products or health supplements are nontaxable in most states. Some states require you to charge sales tax on shipping, while others do not. Some states might need you to renew your sales tax permit periodically, while others do not.
- How much sales tax is charged at state and local level: Sales tax rates can vary by state and locality.
- Origin-based sales tax and Destination-based sales tax: When it comes to determining tax rates, most states fall into one of two major buckets: “origin-based” sales tax states and “destination-based” sales tax states. This means that some states require you to collect sales tax at the rate effective at the point of “origin’,” which is your office or warehouse, while most states require you to collect sales tax at the destination rate, which is your buyer’s address.
- When and how often online sellers are required to file sales tax returns.
- Dates sales tax returns are due.
- Whether the rule is the same for sellers living in the state and sellers living out of the state.
What Creates Sales Tax Nexus?
Sales tax nexus occurs when your business has some kind of connection to a state. This connection can be created in one of the following ways:
- Physical presence: Physical presence is usually established by:
- Having a home or an office: where you live and/or operate your business
- Having an employee
- Having a warehouse
- You have sales via an affiliate program/marketing program. For example, you sell silk flowers, and your business operates in Michigan. You do not have a warehouse, office, company car, or any physical presence in New York. Therefore, you do not have physical nexus within this state. However, HannahFlowerVase.com links to your business from their site via an affiliate program, and HannahFlowerVase.com operates in New York. When they send sales your way, you give them a small cut of the profits. This sale will create another type of nexus called “Click-through nexus.” Most states offer a threshold dollar amount of sales, which until you hit, you should not have to worry about complying with the sales tax on click-through. For example, if the threshold is $10,000, you must hit $10,000 worth of sales in that state for the nexus to affect you. To make things even more complicated, some states allow rebuttable presumption (you are good if you can prove you do not need to pay) or irrebuttable presumption (it is impossible to turn over the state’s law).
- Storing inventory: Most states have ruled – either definitively or vaguely – that 3rd party fulfillment constitutes nexus. This means that if you keep your inventory in a warehouse in a state, then that constitutes sales tax nexus. For example, if you live in Ohio, but store your inventory in California to deliver products faster to California as this is your largest market. You have sales tax nexus in both states.
- Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair.
- Economic nexus: You have economic nexus if you make a certain amount of sales in a state (either a specific dollar amount or a certain number of transactions). The most common economic nexus threshold in a state is $100,000 in sales or 200 transactions in a year. Some states such as Kansas have $0 economic threshold, which means that every sale you make to buyers in Kansas will create sales tax nexus for you.
What if you have sales tax nexus in a state?
Once you have determined that you have sales tax nexus in a particular state, you are required to do three things:
- Obtain a sales tax permit for that state
- Begin collecting sales tax in that state
- Periodically report the sales revenue and remit sales tax collected to the state
What if you have sales tax nexus in a state?
Once you have determined that you have sales tax nexus in a particular state, you are required to do three things:
- Obtain a sales tax permit for that state
- Begin collecting sales tax in that state
- Periodically report the sales revenue and remit sales tax collected to the state
Amazon have collected sales tax for most states. What does it mean to Amazon sellers?
For all but just several states, Amazon, eBay, and other e-commerce platforms have taken care of the collection and remittance of sales tax to states and local authorities.
For these particular states, sellers no longer have the responsibility to collect and remit sales tax.
You might think now that you can go ahead and cancel your sales tax permit. However, it is not that simple.
Many states still require sellers to maintain their sales tax permit and report sales tax but provide an option to separately enter the amount collected and remitted by the marketplace.
For example, in Washington’s sales tax report, you can choose the option “Retail Sales Tax Collected by Facilitator” and then enter the amount of sales tax that a marketplace collected on your behalf in the “RST Collected by Facilitator” box.
By selecting this option, you are reporting the sales made through the marketplace but will not remit any sales tax amount to the state. This requirement seems to be redundant as the states receive the report and money collected from the marketplace and still require the same report from you.
However, for some states, as long as you have nexus, other than sales tax, you are also required to file and pay for other taxes such as Washington Business & Occupation (B&O) tax for Washington. Requiring sellers to maintain sales tax permit and report sales tax will allow the states to collect such other taxes from sellers.
What if you also have sales outside of e-commerce platforms such as a physical store at the state or sales through your website? In this case, you need to maintain the sales tax permit and separately report the sales tax collected and remitted by Amazon, eBay, or other platforms and still need to collect and remit sales tax made through your physical store or website.
For the several states that Amazon, eBay and other e-commerce platforms are currently not collecting and remitting sales tax on sellers’ behalf, it is still your responsibility to collect and remit sales tax to the states for all sales made to those states, regardless of what sales channels you use.
What if you reside in another country and sell in the US market?
If you are international sellers with no physical presence in the United States but sell to buyers in this country, you will determine your sales tax liability based on the economic nexus rule. This means that if a seller – no matter where they are located – makes a certain dollar amount of sales in a state, or a certain number of transactions with buyers in that state, they are required to collect sales tax in that state. If you cross the economic threshold with any state, you are required to comply with that state’s sales tax law.
Want to learn more? Download the complete sales tax guide for online sellers
Other than the information presented above, you will also find
- a summary by state of which locality levies sales tax, whether shipping and gift wrap services are taxable and whether the rule applies the same to in-state versus out-of-state sellers
- a list of states that Amazon, eBay, and other e-commerce platforms are currently collecting and remitting sales tax on sellers’ behalf
- a list of states that have enacted Click-through nexus.
Click here for a free eBook that is a complete sales tax guide for online sellers.
Disclaimer
This blog is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time.