Sales Tax 101

Myth Busted: “I Don’t Need to Collect Sales Tax Until I Make $1 Million in Sales”

by Jennifer Dunn

Sales Tax Million Dollar Sales Myth

I get it. Sales tax can be highly confusing, and many myths and misconceptions swirl around this ubiquitous administrative hassle. Here at TaxJar, we’ve had an increased number of people ask lately if it’s true that you are not required to collect sales tax until you are making $1 million in annual sales. This, unfortunately, is another one of those persistent sales tax myths.

This post will bust the “Million Dollar Myth,” and arm you with the information you need to figure out when you should be collecting sales tax.

When Online Sellers are Required to Collect Sales Tax

In the United States, online sellers are required to collect sales tax in states where you have sales tax nexus and sell taxable products. (Almost all tangible products are taxable.) Sales tax is governed at the state level, and there is not a federal sales tax.

In most states, there is no minimum sales threshold before you are required to collect sales tax from your buyers. State laws say that you should be collecting sales tax on your very first sale. Some states are so strict about this that they require people having a one-time yard sale to obtain a temporary sales tax permit and collect sales tax. (Though this seems nearly impossible to enforce!)

A few states do have a sales threshold before you are required to collect sales tax. In Tennessee, this threshold is $4oo/month or $4800/year. In other words, once you are making that amount in sales in Tennessee then you are required to register for a sales tax permit and collect sales tax. Colorado has a “small home business” exemption, where small home businesses who make less than $1,000 per year in sales are not required to register for a sales tax permit. But in other states, all business owners are required to register for a sales tax permit from the very first sale.

If you just started out and already have nexus in multiple states, such as if you just started selling on Amazon FBA and aren’t making sales yet, I recommend our “When to Register for a Sales Tax Permit” guide. This guide will help you make informed decisions on when to register for your sales tax permit.

For a whole lot more on sales tax, check out our Sales Tax 101 for Online Sellers Guide.

Where did the “Million Dollar Myth” come from?

Right now, one reason sales tax in the U.S. can be confusing for sellers is that there is no “national sales tax.” Sales tax is governed at the state level. As an online seller, if you have sales tax nexus in more than one state, then you are required to abide by each state’s varying sales tax laws, regulations, rates and due dates.

Several national “internet sales tax” bills have kicked around Congress in the past few years. One of those is the “Marketplace Fairness Act,” a bill that purported to help “Main Street” brick & mortar sellers face the threat of online sellers. In this bill, online sellers who made more than $1 million in sales per year would be required to collect sales tax from all buyers in every state, not just their nexus states.

I believe the Marketplace Fairness Act is probably where the “Million Dollar Myth” comes from.

However, this bill did not pass. And, as of the last iteration of the bill, all online sellers would still have been required to collect sales tax in states where they had sales tax nexus.  Sellers who made over $1 million in sales would have also been required to collect sales tax from buyers in every U.S. state. In other words, should the Marketplace Fairness Act pass, smaller sellers would still need to collect sales tax in all nexus states, and larger seller would be forced to deal with sales tax in every state. At TaxJar, we believe the Marketplace Fairness Act is deeply flawed and have always spoken out against it.

I hope this has helped bust a persistent myth. If you wish to consult with someone on your specific sales tax situation, we suggest this vetted list of state and local tax experts. Or if you have a question or something to say, start the conversation in the comments!

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