Sales tax can be complicated for online retailers. The United States government doesn’t make it easy on you, either. Since there’s no national or federal sales tax, it’s up to the fifty individual states to set the laws. While some have opted out, 46 states do collect sales tax and expect retailers to collect and remit sales tax.
This makes understanding US sales tax in general more complicated than many would like it to be. All of that is the perfect breeding ground for unfounded myths. Don’t sweat it, though. This post will shed some light on the most common misconceptions and give you the truth behind the myths.
Myth #1: I Don’t Have to Collect Sales Tax Because I’m Selling Online
This myth comes from the mistaken notion that selling on the Internet isn’t as connected to a physical location as selling at a brick and mortar store. While it is true that the Internet has made it easier for us to connect with buyers and vendors regardless of physical location, online retailers are still subject to individual US state laws on sales tax.
Sales tax is based on whether the tangible property you are selling is taxable, not the way you sell it. (And keep in mind that not all tangible property is taxable. Like many things, it depends on the state laws.) As a rule of thumb, if a product would be taxable if you were selling it face-to-face, it’s taxable if you’re selling it online.
Myth #2: I Don’t Have to Collect Sales Tax on Shipping Costs
There are two factors that decide on whether shipping costs are taxable for a transaction. The first is whether the state considers shipping taxable and requires you to collect it. You can find that out by checking with the individual state laws. The second is whether the items being shipped are taxable. A general rule of thumb is that if the items aren’t taxable, the shipping isn’t either.
If you’ve got an order that includes some taxable items mixed with nontaxable ones, it’s easiest for you to ship those items separately. This allows you to make a clear distinction in the shipping costs and any tax you’re charging on the item or the shipping costs.
However, it often doesn’t make sense to separate shipments, so if you do ship the taxable and non-taxable items together, separate the shipping charges on the invoice. Make sure that the shipping charges for taxable and nontaxable items are clearly separated, along with the sales tax you’re collecting.
Myth #3: I Need to Charge Sales Tax on Every Item I Sell
While it’s smart that you’re serious about collecting sales tax, don’t go overboard. First of all, you need to know whether your nexus state (or states) even considers your products taxable. Nexus states are the ones your business has a significant presence in, meaning your business has activities like staff, inventory, or physical locations there. This includes distribution centers and internal office locations.
Once you know which states you have a nexus in and you have confirmed that those states have sales tax, you have to figure out what is taxable. Most of the time, tangible goods are taxable. However, some states have exemptions. For example, most clothing doesn’t carry sales tax in Minnesota, New Jersey, or Delaware. On the other hand, Arizona, California, Florida, and Connecticut don’t tax groceries. You’ll need to check with your specific state to get information on all exemptions that might apply to your business.
Also, most states have exemptions for retailers buying inventory to be resold. They give out resale certificates to qualified resellers to use as proof of that exemption. If you have one, you present it to your vendor at the time of the purchase to make a sales tax free transaction. If you’re the vendor in the transaction, you verify the certificate as valid and then keep it in your records to show why you didn’t collect sales tax on that transaction.
Myth #4: I Didn’t Make a Sales so I Don’t Have to File a Return
When you get your sales tax license, the state will also assign you a filing frequency. It might be monthly, quarterly, or yearly. Regardless of whether you made any sales, you must file your returns at this frequency. If you had no sales, what you file is generally referred to as a “zero return.” Now this may seem a like a waste of time, but you should think of them as check-ins with the state. They still want to hear from you at the frequency they’ve set up.
If you don’t file your zero returns, the state might do a number of things, ranging from fines to loss of license. In Florida, there’s a $50 fine assessed. On the other hand, California doesn’t fine you for missing your zero returns. Instead it cancels your license after you’ve missed a few zero filings and forces you to reapply if you want to start selling again.
Myth #5: I Don’t Have to Collect Sales Tax Until I Hit the Million Dollar Sales Mark
This myth comes from misinformation surrounding the proposed Marketplace Fairness Act of law. If it had passed, it would have required that any online retailer who had a million dollars or more in sales to collect sales tax in every state that had sales tax as opposed to just its nexus states.
Well, the law didn’t pass but the myth persists. The truth is that how many sales you have to make until you must collect sales tax can vary. There are many states that require you to collect from your first eligible sale onwards. Others have thresholds designed to allow microbusinesses or one-offs like yard sales to operate without charging sales tax. But it really just depends on your nexus states.
For more about sales tax, check out our eCommerce Sellers Guide to Sales Tax. Do you have questions or something to say? Start the conversation in the comments!
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