7 Things You Likely Didn’t Know about U.S. Sales Tax
A guest article by Jennifer Dunn of TaxJar, a service that makes sales tax reporting and filing simple for more than 7,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
As a buyer, sales tax is pretty simple. Every time you make a purchase, the store adds on a little bit extra. But as a seller - the person responsible for figuring out how much sales tax to collect and from who - sales tax can be utterly mystifying! This post will go over seven things you may not have realized about collecting sales tax as a retailer.
1. Sales tax is governed at the state level
In the U.S., there is no such thing as a “federal” or “nationwide” sales tax. Sales tax is governed at the state level. That’s why sales tax rules and laws are different from state to state.
2. You only need to collect sales tax in states where you have “sales tax nexus”
One big myth about U.S. sales tax is that you need to collect sales tax from every single buyer. While big retailers like Wal-Mart or Sears usually do, smaller scale online sellers are only required to collect sales tax in states where you have “sales tax nexus.” Sales tax nexus is just a fancy way of saying “a significant connection” to a state. You always have sales tax nexus in your business's home state (even if you just work from your kitchen table), but you can see which business activities might cause you to have nexus in other states here.
3. Different items are taxed differently in different states
Do you live in Pennsylvania? Then you are probably accustomed to buying clothes without paying sales tax. In most other states, however, clothing is taxable. The same goes for groceries. Groceries are not taxed in most states, but in a few states they are taxed or taxed at a different, lower, rate than other taxable products. As a seller, you want to make sure you know if your products are considered taxable or not so you can be sure to charge the right amount of sales tax on each of your products.
4. Sales tax is due on different dates in different states
One reason sales tax can be so confusing is that different states want you to file at different frequencies and on different days of the month. Depending on how much revenue you make in a state, you may be asked to file monthly, quarterly, annually or even semi-annually (i.e. two times per year). To make matters more complicated, while most states set their sales tax due date on the 20th of the month, others want you to file and pay by the last day of the month, the 15th, the 25th, the 23rd or some other date! With each state wanting you to file on a slightly different date and in a slightly different cadence, it can be difficult to keep up with all of your sales tax filing due dates!
5. Some states are easier than others when it comes to filing sales tax
A handful of states makes sales tax filing very easy. They might only have one sales tax rate and a few jurisdictions. When this is the case, it’s easy to figure out how much sales tax you collected from your buyers in each jurisdiction. Unfortunately, most states are not so simple. They have hundreds of jurisdictions and an equal number of tax rates. In order to file, online sellers need to figure out how much in sales they made to each jurisdiction. Talk about a nightmare! Fortunately, sales tax automation can help if you’re stuck filing sales tax in tough states like California, Washington, Florida, Texas and the other tough states.
6. You should always file a sales tax return, even when you didn’t collect any sales tax
States consider sales tax returns a “check in.” They expect to receive a sales tax filing from you by your due date, even if you didn’t collect any sales tax. And if you didn’t collect, all you need to do is file a “zero return” stating that you collected $0.00. If you don’t file a zero return, you can be subject to consequences ranging from having your sales tax permit cancelled to a monetary penalty. Ouch!
7. Some states give you “sales tax discounts”
On a brighter note, about half the states with a sales tax realize that asking merchants to collect and file sales tax is a big administrative hassle. For this reason, they will allow you to keep a small percentage of the sales tax you collected. While this percentage is usually only 1-3% of the total amount you collected, it’s free money! Here is a list of states that allow for sales tax discounts. Always be sure to read the fine print!
For many more things you might not know about sale tax, check out our Sales Tax 101 for Online Sellers Guide. Do you have questions or something to say? Start the conversation in the comments!