Sales Tax in the US, like most of the countries may be complicated. The fact that the country has 50 states, computing sales tax seems no easy feat. It is also subject to more often than not changes especially that globally, we are facing the pandemic.
Sales tax is a consumption tax imposed by the government for the sale of goods and services. It is also called a ‘pass-through’ tax, where the seller collects that tax from the customers and pays the government for it.
Normally, taxation is easy. For example, you set up a store in your state then you make sales and charge an additional percentage to your selling price, the customers pay for your goods plus the taxes, then at the end of the month, you have to remit it to the state.
However, with eCommerce as the booming business nowadays, many sellers are now selling to customers living in different states. That means, the eCommerce seller needs to keep in mind how much is the tax percentage in most of the states to get the right taxes.
Sales Tax Rates of Different States
(Updated as of April 9, 2021)
As mentioned, tax rates differs from different states. As of today, Delaware, Montana, New Hampshire and Oregon are still Sales Tax Free. While Tennessee charges the highest Sales Tax at 9.55%, Alaska, previously Sales Tax Free is just charging 1.76% of Sales Tax.
Sales Tax Exemptions
There are ways to skip the sales tax, however, there are items in some states that are not taxed. Thirteen states do not charge sales tax on groceries. While some have special tax rates to none on prescription drugs.
Here are some items that are generally not charged with Sales Tax:
- Raw Materials
- Item purchased for a non-profit
- Items for resale
Why States Want to Collect Sales Tax?
Pre-eCommerce era, remote sellers are telemarketers who accept orders via phone and send your orders via mail. It does not greatly affect the percentage of consumers who still prefers buying through shopping centers with more viable and solid tax laws. In short, the State does not worry. It collects majority of what they should from the shops that is located in their state and ignore the small sales earned via call.
Moving forward through the internet age and as businesses evolved with incorporating their advertising through social media, there comes the huge gap between the sales made on actual stores and those sold online. There are billions of items sold that were not being charged with Sales Tax.
Imagine the huge revenue that a state can collect from this amount of sales. The state has to earn and someone has to pay for these. They started to look through the ‘loophole’ and find its way to earn what is due to them which is of value.
By the end of the year, it was estimated that sales on eCommerce platform might hit $ 659.9B (via Statista). That’s a lot of taxes!
At the end of the day, we know that the States gets their fund from taxes, it helped them grow economically and make themselves globally productive.
Sale Tax in eCommerce
On June 21, 2018, US Supreme Court imposed that states may now charge Sales Taxes on online sellers. While it may be considerably confusing, it means that businesses should pay taxes on states where they have economic presence. It doesn’t have to be actually establishing and registering their businesses in that State, but if they are actually selling to the people of that states, the business is liable to collect and remit sales taxes on that state.
The 1992 Ruling called Quill which disallowed states to run after businesses without physical presence on the state was overruled by the 2018 ruling via South Dakota v. Wayfair court decision.
The 2018 US Supreme Court law said that as long as you do business in a state, you must abide with the sales law practice of that state. During that time, it was really messy to figure out how to be taxed. But now, we already have a Marketplace Facilitator Law.
What is a Marketplace Facilitator?
Marketplace Facilitator is a business that lists products from different business owners known as the ‘third-party sellers’ and sells it to its platform. It collects payments, receipts and handles packing and shipping to customers.
Marketplace Facilitator Law is when the seller’s facilitator handles the collecting and remitting taxes to the correct state.
If you are a business owner with a physical presence in a certain state, you must know that you still need to collect and remit taxes on the state even though you also have an agreement with a Marketplace Facilitator.
Later on, we will discuss more of Marketplace Facilitator Laws on different states.
Nexus in Latin means to join or to bind, a link or a connection.
Tax nexus is the connection between a seller and a state that requires the seller to register then collect and remit sales tax in the state. A business may have a nexus with the state if one of the following indication was met:
- Economic Activity
- Physical Presence
- Remote Employees
- Website in-state
- Business Affiliates
- Other activities which may not be limited to warehouses, dropshipping, or receiving sales referrals in-state even temporarily doing a business in-state.
If you have a nexus in a certain state, you must collect sales tax on your customers based on the tax rate where your business has a nexus.
Sales Tax Rate imposition differs from each locality, these are origin-based tax states and destination-based tax states.
Origin-based sales tax states, you charge the amount of state and local sales tax effective at your business’ location to everyone who you ship taxable items in that state. So your location would be your office, warehouse, or your dropshipping hub.
Destination-based sales tax states, you must calculate the sales tax rate effective where your buyer is. This means you would charge multiple sales tax rates within a state.
How to Ensure that Your Business Is Nexus Compliant?
There are many sources online that would help a business owner find a way to be fully compliant with Tax.
One way is to monitor where your items go, and when. As I have mentioned, there are 50 states that your orders from customers could be shipped to. You also have different prices from your listing.
You must have a dedicated person to monitor all these for you or you may consider automating your Sales Tax Computation.
These sales tax automation systems have direct integration with your marketplace facilitator that will compute taxes when you need it. It may seem costly but it will save you a lot of time.
Taxes and Covid-19
We already know that taxes are ever-changing, we have to expect the major changes on the tax rulings. COVID, the global pandemic surely hit the laws for sure. For example in July, New Jersey have set a new tax law that it would impose taxes on those who process 10,000 transactions through electronic infrastructure in their state. (Source: Bloombergtax )
The good thing is, you can still do well without having to worry how to remember all these tax laws, you just need to hire a professional that can help you out with taxes, and let you to save more!