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Where and When Should I Collect Sales Tax?

author photo of Michael J. Fleming

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.

Questions or Comments? While Michael Fleming is no longer with Peisner Johnson & Company, you are welcome to submit business sales tax questions or comments using the COMMENT feature which follows each post. Alternately, you may send questions or consultation requests directly to Peisner Johnson & Company’s founder (Andrew Johnson) using the orange “Request a Consultation” link on linked FIRM PROFILE page.

Other recent “Sales Tax Basics” posts by Michael J. Fleming:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

16 Responses to Where and When Should I Collect Sales Tax?

  • Posted by Buzlabee on June 21, 2018 6:06pm:

    I am just starting my photography business at my home studio in Michigan, however, I live so close to Indiana, that I will most likely do some onsite sessions there. Would I be creating nexus in Indiana and if so, do I need to be set up to collect Indiana taxes as well? Also, do I need to collect sales tax for the following: sitting fees, all-inclusive pricing where I am charging one flat rate that includes the digital files that are downloaded from an online gallery along with a photo album, and then for certain events that just require me to take the photos on a client supplied memory card and just simply hand over the card when finished? I am also thinking about offering my photo editing services to other photographers who want to outsource that part of their business; is this kind of thing taxable?
    I am so happy to have found someone with your knowledge and expertise, Thank you so much!

    • Posted by Andy on June 25, 2018 2:34pm:

      Hi there! And congrats on starting your new business! In Michigan, stand-alone photography services, where there is no sale of photographs, are not taxable because photography services, themselves, are not taxable.

      Now re: Indiana: You would most likely have nexus in Indiana by doing sessions there, but here's the deal in Indiana: Photography services are not generally subject to tax there as long as they are stated separately from the sale of photographs in a tangible form. However, photography services are subject to tax if the photographs are delivered in a tangible form - such as physical photographs or photographs on a C.D. or flash drive.

      So, in Indiana, your services won't be taxable as long as you don't deliver them via tangible media.

  • Posted by Justin on May 29, 2018 8:44am:

    Hello Michael,
    I am currently in the process of starting a t shirt business using the print on demand company Printful. Im selling the products through shopify and the sales tax portion confused me a bit, sorry if my question is a no brainer. Under taxes, I am required to add a physical presence where I would charge county, state and municipal taxes. The two fulfillment centers where the shirts will be made and shipped are California and north Carolina, while I myself live in New Jersey where we do not charge sales tax on clothing. Would I have to add all 3 states under Physical Presence or just the states where sales tax is charged ?

    • Posted by Andy on May 29, 2018 9:34am:

      Hi Justin,

      Thanks for asking! I like the name of the company. Clever! You have a physical presence where you live (NJ) and in the states where you own tangible personal property. As of now you would only be required to collect sales tax where you have that link or connection. Sales into a state do not create this link or connection. This may all change in June if the US Supreme Court decides to overturn Quill. So based on the limited information provided, it appears you only have responsibility to collect sales tax in NJ if you sell something other than clothing.

      However, there is a new trend amongst the states called notice and reporting. In these states if your sales cross certain thresholds you are required to provide a series of notices to your customers. Voluntary registration relieves you of this responsibility.

  • Posted by cheri on May 7, 2018 11:39pm:

    I am a toffee maker/seller in Texas. Of course, when I do events, I collect sales tax. My question concerns shipping. My only nexus is Texas. If someone from Texas orders from me online, and wants me to ship as a gift out of state, do I collect sales tax?

    • Posted by Andrew on May 8, 2018 8:18am:

      Hi Cheri!
      Toffee when made right is a fav! Can't be chewy right? Can't be super crunchy either, just the right amount of crunch (probably not the right terminology, I'm sure). I don't know how you make it so good, but I sure enjoy eating it! But one thing I do know is sales tax :) And you're right, if you're only nexus is in Texas, then you only collect sales tax on shipments/deliveries in Texas. If you're shipping it outside the state thru FedEx/UPS/USPS, then you don't collect Texas sales tax. If your sales shipped to customers outside of Texas are few in number and low in total dollar amount, then you don't have any big worries. But if your sales are large in other states, you could potentially run afoul of the notice and reporting states, and you could face some economic nexus requirements. If so, we should discuss your particular situation. (We offer free consultations, BTW). One thing you said that concerned me and I just want to check into this more: you said you collect tax when you "do events". Are those events in Texas only? If you do events in other states, then you could be creating nexus in those other states. Just wondering. Thanks for asking the questions and good luck on the Toffee!

  • Posted by Shawn on April 30, 2018 10:13am:

    Hey Michael,

    I plan to open an online t-shirt business very soon and live in South Carolina. I plan to use a fulfillment center company that is located in both California and North Carolina. I understand they have to charge me sales tax for all the items I sell to customers in these states. However, I am confused on whether or not I need to charge sales tax to my customers in South Carolina. My business is a sole proprietorship, unregistered, holds no inventory, and has no office in South Carolina. Can you offer me advice on my tax obligations to South Carolina?

    Thanks

  • Posted by Adam on April 6, 2018 1:03pm:

    How in the world do you know so much about all of this? That is amazing. Meanwhile I am starting to do some drop shipping and the states you mentioned are still going to charge me sales tax which makes transactions COST ME TO SELL THEM and so I need to learn about this everything I can.

    I've been printing your articles and reading them - if you have any addressing how to communicate with these difficult states and possibly dissuading them from charging me the sales tax, I would really appreciate that.
    I understand that it gets to be a mess when they want to charge my supplier, and then if they don't charge me THEY are doomed. In all honesty the sales tax mess across the country reminds me of several hoodlums who drank too much and went out robbing everyone. Who is taking how much of what when and from which one of who and trying to justify why and making the amount of sense due to taking so much of the alcohol.
    But I sure hate to simply disable those states - you know?
    PS:
    I cannot believe that you are not charging people for this. Thank you for your articles!!

    • Posted by mikefleming on April 8, 2018 5:25pm:

      Hi Adam,

      We answer what we can in this forum, but many sellers require detailed research or consultations.

      Based on your email I think you would benefit from a consultation.

      States do not charge sales tax, they require sellers to collect the tax if they have nexus, and/or the purchasers to pay it. This tax is collected/paid on every single transaction. The only way a seller with nexus can avoid collecting the tax from their customer, in this case you, is if you can provide them with a valid certificate in the ship to state.

      The only way you can avoid complying with your vendors is by having all your vendors ship to your home state where you take delivery and then you shipping the packages to your customers yourself.

      Trying to speak to states will not generate any deviations from the established their policies.

  • Posted by Marsha on April 5, 2018 9:51am:

    I work for a municipal government in Maryland. The town will be selling souvenirs, t-shirts, etc. this year.
    As a municipal government, are we supposed to charge sales tax for these items?
    We have both an EIN and a MD Tax Exempt number.
    Thank you.

    • Posted by mikefleming on April 8, 2018 4:52pm:

      Hi Marsha,

      The answer is maybe. Taxes are intended to be paid by purchasers and collected by sellers. Some states have exemptions for sales by non-profits , but in general the exemptions are for purchases not sales. This would require research into what Maryland requires.

      If you wish us to research for you let us know.

  • Posted by Clayton on April 5, 2018 9:37am:

    Michael,
    I have a question about Alabama, Arizona, and Arkansas. As I understand it, these states will except a home state exemption certificate. Speaking specifically about AL, we do not have Nexus there, but one of our drop-ship suppliers does. I would like to present my drop-shipper with an exemption cert so they will stop charging me tax on orders they are shipping to AL. I spoke with the AL tax office and they will not accept my application for exemption because, according to them, I do not need it. Also because I am not registered with AL to pay sales tax. I need some advice on how to deal with these three states, as it relates to providing the proper paperwork to my drop-shipping supplier. Thanks!

    • Posted by mikefleming on April 5, 2018 9:47am:

      Hi Clayton,

      When we talk about what a state will accept, we are referencing what the state will accept if they audit your vendor. So if a state will accept your home state exemption certificate that is what you would provide your vendor.

      There is no need or reason to contact the state.

      Sometimes your vendor may not understand what they can accept. In these cases you can ask them what they will accept or if the money is material, you can get them on the phone with us and we can walk them through what they can accept that will allow them not to charge you sales tax while still protecting them.

      Mike

      • Posted by Clayton on April 5, 2018 11:37am:

        Mike, thank you for the prompt reply. I will address with my vendors accordingly and circle back should we need additional help.

  • Posted by JOGEN on April 4, 2018 10:50am:

    Dear Michael,
    We are in the process of setting up an internet business based out of Coppell, Texas. We will only have small warehouse presence in Texas. However, our sales orders may come from any of the 45 states. We will be shipping these orders through FedEx. Initially there will be no 'nexus' except Texas. Should we collect only Texas Sales Tax? If for example if we deliver a shipment to California, are we required to collect California Sales Tax or Texas Sales Tax? Also, Do we need to register with California Sales Tax?

    • Posted by mikefleming on April 4, 2018 6:49pm:

      Hi Jogen,

      As of now you would only be required to collect sales tax where you have a link or connection. Sales into a state do not create this link or connection. This may all change in June if the US Supreme Court decides to overturn Quill. So based on the limited information provided, it appears you only have responsibility to collect sales tax in Texas.

      However, there is a new trend amongst the states called notice and reporting. In these states if your sales cross certain thresholds you are required to provide a series of notices to your customers. Voluntary registration relieves you of this responsibility.

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