Unlocking the Mystery: When to Collect Sales Tax on your US sales

So, you’ve finally got your head around nexus and understand that your business might have to comply with Sales Tax rules in certain US states. But when and how do you start collecting sales tax?

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It is essential to understand the timing of Sales Tax collection. Here’s a simplified explanation:

Sales Tax Collection Requirements

You’re only required to collect sales tax in states where you have nexus. Typically, this is only when you have a physical presence in state (like employees, a warehouse or office). In states where you have no physical connection, nexus is triggered when your sales reach a specific threshold.

Taxable Transactions

You should charge sales tax on transactions delivered to customers in states where you have nexus. For example, if you only have nexus in California, you charge tax on all sales made to Californian residents.

Out-of-State Sales

For sales to customers in states where you do not have nexus, you generally do not have to charge sales tax. 

Sales Thresholds for Registration

Across different US states, there are thresholds, which can be a specific dollar amount of sales or a particular number of transactions, that determine when you must register for sales tax. 

Most states have set either a $100,000 or a 200-order threshold. Until your total annual sales in a state hit this threshold, you are not obligated to add tax to your transactions. 

State nexus selling thresholds  

Sales Tax Registration

If you have nexus in a state, you must register with that state (by applying for a Sales Tax permit or ID). You will be registered as an “out-of-state” seller and should only start collecting tax after completing this registration process 

Gradual Registration

You don’t need to register in all 50 states right away. Most businesses start by registering in the states where they have physical presence (nexus). As you expand and your sales reach the threshold in other states, you can then register and initiate tax collection for sales to customers in those states.

Managing Tax Collection

When you have nexus and have registered for sales tax, you’ll need to set up your systems to start adding tax on sales to that state.  Many systems have in-built sales tax functionality (for example, Shopify, Stripe & QuickBooks) – so the setup is simple.  
 
If your website or billing system doesn’t have native sales tax calculation, you’ll need to understand how to set up tax collection at checkout or when invoicing.   

When you hit a nexus threshold, you register and then “activate” sales tax collection, so your website or billing system automatically calculates and charges tax on sales to customers in that state moving forward. 

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