One of the most frequently asked questions I receive is when and where should I collect sales tax. There are 45 states plus Washington D.C. that have a sales tax. There are five states that do not have a state level “sales” tax. They are New Hampshire, Oregon, Montana, Alaska and Delaware. If you take the first letter of each state you have the acronym NOMAD.
Sales tax is generally due in the state where the customer receives the product. For online sales this is where the product is shipped. You do not currently have to collect sales tax everywhere, but sales tax should be collected in all states where the following three criteria are met:
1) You have nexus.
2) What you sell is taxable.
3) Your exposure is material.
Nexus is a fancy term that simply means link or connection. It all starts with Nexus. If you have a link (nexus) with a state, the state can require you to collect taxes. If you do not have this link, than the state cannot currently require you to collect taxes. While nexus requirements can vary by state (so it's important to check) here are three of the most common nexus creating activities:
1) Anywhere you live or operate your business.
2) Anywhere you store inventory or own any type of property.
3) Anywhere you have employees or third-parties who help you to establish or maintain a market.
If you determine you have nexus in a state then you need to determine if what you sell is taxable in that state. Taxability can vary from state to state.
If you have nexus and what you sell is taxable, then we next have to look at materiality. Even though a state may say you should collect sales tax on all sales, sometimes that may not make good business sense. For example if you sold $1000 worth of items in a state over the course of a year and the average sales tax rate was 8% you would owe $80 worth of sales tax. In this scenario, the cost of compliance would probably exceed the amount sales tax that would be collected and remitted. So in this case many businesses would wait until their exposure reaches a level that justifies the cost of compliance. There are a lot of factors that go into this calculation and each business will have to determine what is material for them, in general I cannot make the math work when the annual sales in any one state are less than $3,000.
Sales tax is very important and with penalties and interest often approaching 50% or more, you want to make sure you don’t wait too long to take care of becoming compliant, but neither do you want to make the mistake of starting too early.
Other recent “Sales Tax Basics” posts by Michael J. Fleming:
- Where and When Should I Collect Sales Tax?
- Amazon Turns Over Third-Party Seller Tax Data to Massachusetts
- Are Amazon FBA Sellers Responsible for Collecting Their Own Tax?
- Additional Amazon FBA Tax Amnesty Information
- Amazon FBA Tax: New Amnesty Can Protect Delinquent Sellers