Will you be at Midwest eComm July 21-22, 2017 in Minneapolis? If so, be sure to join me Saturday morning at 10:50 for “10 Sales tax Myths – Busted!” Bring your questions, and score a comfy TaxJar t-shirt!
We talk to TaxJar customers and other people curious about sales tax every day. When you talk to so many people, you start to notice recurring themes, and one of those themes are “sales tax myths.” These are the rumors and misconceptions that seem to crop up over and over again. And I totally get it! Sales tax is complicated. And it isn’t always intuitive.
To counteract some of the more common myths, I put together this list. Feel free to add your own “sales tax myths” in the comments!
Sales Tax Myth #1: I paid sales tax when I bought an item, so I don’t need to charge sales tax when I resell it
Not so fast. If you’re selling a taxable item to a buyer in a state where you have sales tax nexus, then you need to charge sales tax on that transaction even if you paid sales tax when you bought the item.
It helps to think of sales tax as a tax on the transaction rather than a tax on the item.
Luckily, there are a couple of ways to keep from having to pay sales tax on items you buy for resale. You can present a resale certificate when you buy or you can attempt to recover the sales tax you paid later. Here’s a blog post from CPA Ned Lenhart about recovering sales tax you paid on an item you intended to resell.
Sales Tax Myth #2: I didn’t make any sales, so I don’t need to file a sales tax return
When you’re issued your sales tax permit, your state will also issue you a filing frequency. This is normally monthly, quarterly or annually. Your state expects to hear from you on that due date whether or not you collect sales tax.
States consider your sales tax filings a sort of a “check in” to let them know you’re still in business – even if you took the quarter off and didn’t collect any sales tax from buyers over the taxable period. The return you file when you don’t have any sales tax to report or pay is often referred to as a “zero return.”
The way states handle not hearing from you varies. Florida is harsh – they’ll assess a $50 penalty for failing to file a zero return. (Though we’ve heard of sellers calling the state’s department of revenue and successfully having this penalty waived!) California, on the other hand, won’t fine you but if you continue to fail to file zero returns they may send you notices or even go ahead and cancel your sales tax permit. While this isn’t the end of the world, it would necessitate the chore of contacting the state and reinstating your permit.
Sales Tax Myth #3: I charge sales tax based on the rate at my location
This is one of those myths that is sometimes true, but a whole lot more complex than we’d like it to be. If you are an eCommerce seller based in a state with an origin-based sales tax, then yes, you do charge sales tax based on the sales tax rate at your location. But only a few states are origin-based so most sellers have a harder time of it.
But if you’re an eCommerce seller and live in a state with a destination-based sales tax, then you’d charge sales tax based on the ship-to location of the buyer.
Things get even more complicated if you have nexus in a state other than your home state. For the most part, you’d charge sales tax based on the buyer’s ship destination in those states, too. You can find out a whole lot more about what sales tax rate to charge your buyers here.
Sales Tax Myth #4: This seller isn’t located in my state, so they can’t charge me sales tax
We sometimes get questions from eCommerce buyers who are concerned that they were erroneously charged sales tax. This often comes after they’ve seen that the seller shipped them a package from another state.
Example: “I live in North Carolina but my package shipped from Maryland. Why was I charged sales tax?”
The fact is, companies can have sales tax nexus in a state for many reasons. Maybe they have a store, a warehouse or an employee there. “Ship from” location can be totally irrelevant. Companies can even choose to comply with sales tax laws and collect sales tax in states where they don’t currently have sales tax nexus. (States are broke and totally fine with anyone collecting sales tax revenue for them, believe me!)
Do you still think you may have been charged sales tax in error? You can always contact the seller to double check. As we all know, sales tax is complicated and sellers can easily make a mistake. Most sellers are more than willing to either offer an explanation on why you were charged the amount of sales tax you were charged or refund the amount charged if a mistake occurred.
Sales Tax Myth #5: My Amazon inventory gave me nexus in this state. So I only have to collect sales tax from Amazon buyers in that state
Here’s how this myth usually plays out. Our seller, Jo, lives in Illinois and sells on eBay. She has decided to branch out and begin selling using Amazon FBA. Once Jo begins selling on FBA she finds out that she has sales tax nexus in 5 additional states where her FBA inventory is stored. So Jo registers for her sales tax permits in all the states where she has nexus, and she sets up sales tax collection through Amazon (and only Amazon). Did you spot the problem?
Jo forgot that nexus is nexus, no matter what platform you sell on. So even though selling through Amazon FBA gave Jo nexus, she is still required to collect sales tax from buyers on all the platforms on which she sells. So Jo would need to collect sales tax from her Amazon buyers but also from her eBay buyers in those nexus states. And if Jo ever decides to branch out and sell on her own website through Shopify she’d need to collect sales tax from her buyers in all the states where she has sales tax nexus.
To sum it up: once you have nexus in a state, charge sales tax to all buyers in that state.
I hope this post has helped shed some light on these 5 rampant sales tax myths. Do you have another myth you’d like to dispel? Or a sales tax question? Start the conversation in the comments or over in our Sales Tax for eCommerce Sellers Facebook Group.