When it comes to selling in the USA, charging sales tax correctly can be tricky. As a seller, you are legally obliged to collect and remit sales tax on behalf of the state in certain circumstances, which creates a compliance burden.
You only need to charge sales tax on your transactions in a state where you have nexus. For this discussion, we refer to the case where a business has nexus and has registered for sales tax and is therefore obligated to add tax to their quoted selling price.
Which state’s tax applies?
Sales tax is generally a destination-based tax – if the product is delivered to a customer in a state (or downloaded in the case of digital products), then it doesn’t matter where the seller is based or where the physical goods came from. This includes deliveries that originate outside the US – goods delivered to a customer in New York are subject to NY sales tax whether they were shipped from Manhattan, Miami or Mumbai.
What tax rate applies?
Unlike other consumption taxes (like VAT or GST), there are multiple sales tax rates within a state to consider. When you have to charge VAT in the UK, the VAT rate will either be 20% (or in very few cases, a reduced rate of 5% may apply), When you sell to a U.S. state – although there is a fixed “state-wide” sales tax rate, each jurisdiction is allowed to add a local sales tax to the state rate,
For example, the state rate in California is 6%, but a sale to Los Angeles could be taxed at almost 10%. In total, there are over 13,000 local tax jurisdictions across the US and the rates can vary from 3% to 11%
Why does the type of product matter?
If thousands of local rates didn’t complicate matters enough, the type of product being sold also affects what sales tax to charge. For example, food might be exempt in some states (so no tax applies), but taxable in others. Within a state, the same food item may be exempt from state tax, but certain localities will add local tax! It goes on and on – the point is that the only accurate way to calculate tax is to assess the combination of the product type and the delivery address of the buyer, and only then can you determine what rate to apply.
It should be clear that deciding what sales tax rate to apply to your transactions is no simple matter – it is almost an impossible task without software to do the heavy lifting. But it is vitally important that you get this right because failure to charge the correct tax and remit it to the state tax office can result in penalties and other punitive measures that can be deadly to your business.