Sales Tax 101

Why Your Sales Tax Liability is Specific to Your Business

by Jennifer Dunn

Sales Tax Liability

As TaxJar’s Chief of Content and Community, I spend a lot of time speaking with sellers in person and online. Maybe we’ve even chatted on Facebook or at an eCommerce event. (If so, then hi!)

One thing I often see and hear is two eCommerce sellers discussing sales tax.

Seller A says: “Sales tax is easy. I collect one sales tax rate and it takes me about 5 minutes to file my sales tax return once per year in January.”

Seller B will then say: “Wait, no. Sales tax is hard! I have to collect a different sales tax rate in every city, county and jurisdiction and it takes me two hours to file a sales tax return every month.”

Which seller gets sales tax right?

They’re both right!

Sometimes I see these conversations leaving sellers feeling frustrated or like they’re “doing sales tax wrong.” But the fact is that your business’s sales tax liability will be individualized to your business.¬†How easy or hard your business’s sales tax life is depends on a number of factors, including:

The state (or states) where you have sales tax nexus

Forty-five states and Washington D.C. all have a sales tax, and each state gets to make their own rules, regulations and laws about how sales tax is administered.

Some states make sales tax simple. They have one statewide sales tax rate across the board and no local rates. For example, if you have sales tax nexus in Connecticut, you are only required to the charge the Connecticut statewide rate of 6.35% to ALL of your Connecticut customers. Easy peasy. (Here’s a list of states that don’t have local sales tax rates.)

But most states are a lot more difficult. They allow counties, cities and other special taxing districts to have a sales tax, too. This is why you may be accustomed to paying 6% sales tax at the store around the corner from your house, but then pay 7% sales tax when you make a purchase in the next town over from yours. Or why you’re taxed at 9% within the city limits, but only at 6.75% outside the city limits.

As an online seller, you are required to collect sales tax at your buyer’s ship-to address. In states with many local sales tax rates, this could mean that you charge many different sales tax rates. And when it comes time to file sales tax, you’ll be responsible for breaking those rates down by city, county, etc. This is why sellers with nexus in a state with local sales tax rates have a harder time with sales tax than sellers in states with a single statewide sales tax rate.

Your sales volume & filing frequency

When you register to collect sales tax from buyers in a state, states will assign you a sales tax filing frequency. This is generally either monthly, quarterly or annually, though some states have other frequencies. (And some very large volume sellers may even be tasked with filing sales tax more than once per month!)

How often you are required to file is specific to each state, but for the most part, the higher your sales volume in a state, the more often you are required to file a sales tax return.

The reason for this is that each state uses sales tax to pay for budget items like schools, roads and public safety. They want a steady stream of income coming in from sellers. So, with a high volume seller, they may want you to file a sales tax return and remit the sales tax you’ve collected each month. But if you are a lower volume seller, they will likely be satisfied with you filing and remitting sales tax just once per year.

You can read more about what sales volume correlates to monthly, quarterly and annual sales tax filing by choosing your state from this list and navigating to the “How often will you file sales tax returns in [state]?” header.

The products you sell

Most tangible personal property is taxable. Tangible personal property is just a fancy way of saying things – lamps, coffee cups, toothbrushes, etc. But in some states, some product categories are not taxable. For example, groceries are not taxable in most states (though food bought ready-to-eat generally is.) Clothing is also non-taxable in some states, as well as textbooks, medication and medical devices, supplements, and some media such as magazine subscriptions and religious books.

To make matters a bit more complicated, sometimes these items are taxed, but at a lower rate than normal. For example, groceries are taxed in Illinois, but only at a rate of 1%. And clothing is non-taxable in New York, unless it is priced at $110 or more. And further, some counties and cities don’t recognize this exemption. (You can read all the details of the New York clothing sales tax exemption here.)

Every state is a little different when it comes to what is and what is not taxable, so some online sellers have a harder time than others dealing with things like tax exempt items. You can read more about what is and is not taxable in each state here.

Your state’s sales tax filing system

Last but not least, some states make sales tax filing harder than others. With most states, you are not only required to collect sales tax at multiple rates from buyers through out the state, you are also required to tell the state how much sales tax you collected in each:

  • city
  • county
  • other special taxing district

For example, say you collected 10% sales tax from a buyer – 6% was the statewide sales tax rate, 1% was the county sales tax rate and 3% was the city sales tax rate. The state wants you to break this amount down, combine it with your other sales, and let them know how much you collected in each taxing jurisdiction. And most states have hundreds of taxing jurisdictions!

A handful of states, however, are much simpler. They only require you to collect one sales tax rate, so you don’t have to go through the pain of breaking these numbers down. Once again, the process of sales tax filing can be very different from seller to seller.

In Summary: Sales Tax Differs Widely from Business to Business

To sum it up, while one seller may have a very easy time of collecting, reporting and filing sales tax. Other sellers have the bad luck of having sales tax nexus in a state with multiple sales tax rates and complicated sales tax filing rules.

Do you have questions or comments about why no two sellers’ sales tax liability is exactly alike? Start the conversation in the comments!

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