Anyone who has been to the USA and enjoyed a little retail therapy in one of the local shops will know that the price you see is not always the price you pay. Unless you visited one of the handful of states that don’t impose sales tax, you would have experienced the $50 pair of jeans costing you more than $50, as sales tax is added at the till.
As an online business, you need to be aware of your sales tax obligations, starting with the most fundamental question: who pays sales tax, and when is it charged?
This article gives a whirlwind tour of the world of sales tax with the intention of arming you with a basic, high-level understanding of how this tax will impact your business.
What Are Sales Taxes?
Sales tax is imposed by individual states in the US on transactions that occur within their borders. Typically, this tax is triggered when a retail sale is completed—meaning, when you actually sell something. Originally, sales tax applied only to physical goods (referred to as “tangible personal property” or TPP), but over the years, most states have broadened the scope to include digital products. This means everything from software and mobile apps to online content (think eBooks and streaming services) can be taxed now.
For the most part, sales tax applies to all retail sales, but there are exemptions. What gets taxed (and at what rate) can depend on the product and the buyer. As a seller, it’s your responsibility to know what products are taxed and at what rates in each state you operate in.
Who Is Responsible for Sales Tax?
Now, here’s where things get a bit trickier. In the US, there’s no one-size-fits-all answer when it comes to who is responsible for paying sales tax. It depends on the state you’re dealing with, and the rules differ from one state to another.
In most cases, the tax is technically paid by the buyer, but the responsibility for collecting and remitting that tax falls on the seller. Some states make it clear that it’s the seller’s job to collect the tax from the buyer and pay it to the state. Other states impose the tax directly on the seller but allow them to pass it on to the buyer, and some states divide the responsibility between the buyer and seller.
As a business owner, you need to know where your responsibilities lie. Usually, sales tax is calculated based on the gross receipts, meaning the full price the buyer pays, not the net profit the seller makes. For sellers doing business across multiple states, this can be a bit overwhelming—but it’s critical to get it right. Missteps can lead to audits and penalties down the line.
Sales tax has become an increasingly important source of revenue for state governments, so as a seller with customers in the US, it’s crucial to be aware of your obligations as soon as your nexus (or connection) with a state is established. More on that later.
What Is Nexus, and How Does It Affect You?
“Nexus” is a legal term that refers to the connection between a seller and a state that triggers sales tax obligations. If your business has nexus in a state, you’re required to collect and remit sales tax for sales made to customers in that state.
So, how do you establish nexus? It can happen in several ways:
- Physical Nexus: If your business has a physical presence in a state (such as an office, warehouse, or employees working there), that’s an automatic trigger for nexus.
- Economic Nexus: Even if you don’t have a physical presence, some states have laws based on the volume of sales or the number of transactions in that state. For example, if you make more than a certain amount of sales (say, $100,000) or have a specific number of transactions (like 200 sales) in a state, you’ll likely have to charge sales tax.
As more businesses go online, economic nexus has become a major focus. This is particularly important if your business sells to customers in multiple states. You need to be aware of each state’s threshold and the rules for when sales tax applies.
Sales Tax Rates and Exemptions
Now that we’ve talked about the basics, let’s get into the weeds a bit: rates and exemptions.
Sales tax rates vary dramatically from state to state, and even within states! There’s no uniform sales tax rate across the entire US, which can make things confusing for online sellers. Some states don’t have any sales tax at all (hello, Delaware!), while others charge upwards of 10% on certain goods and services.
In addition to varying rates, there are also different types of exemptions. For example, many states offer exemptions for:
- Groceries: In some states, food for home consumption is exempt from sales tax.
- Clothing: Some states, like New York, exempt clothing from sales tax, while others tax it like any other item.
- Resale Exemption: If you’re buying goods to resell them, you may be exempt from paying sales tax on those items (but you’ll have to prove this to the state).
If your business deals with exempt products, it’s important to know the rules of each state to ensure you’re handling sales tax correctly.
What Happens If You Don’t Charge Sales Tax?
If you fail to charge sales tax when you should, the consequences can be severe. States take sales tax seriously, and if you’re found to be non-compliant, you could face audits, penalties, and even back taxes.
It’s easy to overlook sales tax if you’re just getting started, especially if you’re selling in only one or two states. But as your business grows and your customer base expands, your sales tax obligations will likely increase, too. Ignoring this can cost you dearly in the long run.
One way to avoid errors is to use sales tax automation software, which can help you calculate and collect the right amount of tax. There are plenty of tools (like ours) out there that can integrate with your eCommerce platform and ensure that you’re staying compliant.
Should You Worry About Sales Tax?
In short, yes. If you’re selling in the US, it’s essential to pay attention to sales tax laws and understand your obligations. Whether you’re a small online shop or a large eCommerce business, ignoring sales tax can lead to financial and legal headaches.
Sales tax is complex and can vary depending on where your customers are located, the products you sell, and your business structure. As an online seller, it’s your responsibility to stay informed and ensure compliance.
The good news is that with the right knowledge and tools, it’s possible to manage your sales tax obligations effectively. There’s no one-size-fits-all solution, but by staying proactive, you can avoid the pitfalls that many online businesses face.
Wrapping Up: Sales Tax Doesn’t Have to Be Scary
Sales tax doesn’t have to be the nightmare it’s often made out to be. While it may seem like a lot to wrap your head around at first, breaking it down into manageable pieces makes it easier to navigate. Start with understanding your nexus, the rates that apply in your state, and the products that are taxable.
Remember, when it comes to sales tax, the sooner you get ahead of it, the better. If you’re feeling overwhelmed, don’t hesitate to consult a tax professional. They can help ensure that you’re on the right track and help you avoid any future headaches.
Now that you know the basics of US sales tax, you’re in a better position to ensure that your business complies and that your customers aren’t left with any unexpected surprises at checkout.
The information in this article is true to the best of our knowledge at the time of writing, but sales tax regulations can change very quickly. You should always consult a tax professional for legal advice.