A lot of rumors and myths swirl around U.S. sales tax, and there’s a good reason for that. Forty-five U.S. states have sales tax, and each individual state makes their own rules and laws. To add insult to injury, states aren’t always great about letting business owners know how to stay compliant.
Today I want to dispel some of the most common rumors we hear about sales tax, and take some of the mystery out of this administrative chore product sellers face.
Myth #1: I don’t have to collect sales tax since I only sell online.
The truth is that any sale of taxable property, whether you sell online, at a brick and mortar store, or at a booth at a craft fair, is taxable. There are always exceptions, of course, but for the sake of sales tax, internet sales follow the same rules as face to face sales.
Myth #2: I have to charge every customer sales tax & Myth #3: I don’t have to charge any customers outside my home state sales tax.
These two common sales tax misconceptions are actually two sides of the same coin. In the U.S., at least, online sellers and other retailers 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 presence” in a state. You always have sales tax nexus in your home state, because you operate your business there. But other common business activities – like having a physical location, employee, salesperson, contractor or even inventory in a warehouse – also creates sales tax nexus.
So if you live in New York and have an employee based in neighboring New Jersey, then you’d have sales tax nexus in both states. In that case, you’d be required to charge sale tax to buyers in both states. But if you have a buyer in Georgia, a state where you don’t have nexus, then you would not be required to charge sales tax to your Georgia buyer.
For more info, here’s a list of what factors create sales tax nexus in every state.
Myth #4: I should charge sales tax on every item I sell.
Most “tangible personal property” is taxable, but the keyword there is most. In some states, items considered necessities – like groceries, clothing, medicine or textbooks – are not taxable. In other states, those items are taxed at a different lower rate. For example, most clothing is nontaxable in Pennsylvania. But in New York, only clothing priced at under $110 per item is non-taxable.
Each state gets to decided what is and is not taxable. If you have questions about whether or not what you are selling is taxable, check out your state department of revenue website, or give them a call.
Myth #5: I paid sales tax when I bought an item, so I don’t have to charge sales tax when I sell it.
If you sell a taxable item at retail, you are required to collect sales tax on it even if you paid sales tax when you bought the item. It often helps to think of sales tax as a tax on the transaction rather than a tax on the actual item.
Fortunately, there are ways around paying sales tax on items you intend to resale. If you have a seller’s permit (required in order to collect sales tax), you can generally buy items tax free at retail using a resale certificate. You can read a whole lot more about resale certificates here.
Myth #6: I didn’t collect any sales tax this taxable period, so I don’t need to file a sales tax return.
This myth can cost you money. Always file a sales tax return when your due date rolls around, even if you didn’t collect a penny in sales tax. States consider sales tax filings to be a “check in” and if you don’t file, they can impose consequences from a monetary penalty to revoking your sales tax permit. Note your sales tax due dates down and be sure to file to prevent unnecessary penalties!
Myth #7: Contending with sales tax will always be a difficult, administrative hassle that wastes time and energy I could be using to build my business.
There are business activities that make you money – sourcing a new product line, negotiating a deal with a supplier, or even writing a stellar product description. And then there are the necessary hassles – like paying the power bill, bookkeeping and dealing with sales tax. Fortunately, technology is here to help. A sales tax automation solution can reduce the time and hassle you spend dealing with sales tax to mere minutes per taxable period. Don’t waste time and brain power on administrative hassles!
About the Author
Jennifer Dunn is TaxJar’s Chief of Content. Her passion is making tough sales tax topics simple so you can get back to doing what you do best – running your business! Connect with Jenn on Twitter @TaxJarJenn.
TaxJar is a service that makes sales tax reporting and filing simple for more than 8,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!