Oodles of myths and misconceptions swirl around sales tax. Even the savviest online sellers can get confused about sales tax for a number of reasons. For one, sales tax is governed by the state level and every state is different. Also, sales tax guidance is often written in legalese and jargon that no busy business owner has time to decipher!
We dispel these myths and misconceptions every day at TaxJar, so I thought I would share the most prevalent of them with you here.
Myth #1: I sell online, so I don’t need to worry about sales tax
This is by far the most prevalent myth about eCommerce sales tax. And the truth is that you are required to charge sales tax on taxable retail sales to your buyers no matter if you sell online, at a brick and mortar store, or in a hot dog stand.
The two major factors that go into deciding whether or not you have sales tax are:
Nexus – You have sales tax nexus in a state. Sales tax nexus is just a fancy way of saying a “significant connection” to a state. You always have sales tax nexus in the state where you run your business, even if you run your business from your kitchen table.
Taxability – You sell taxable products. In most cases, “tangible personal property” is taxable, though, in some states, certain items like clothes or groceries are tax exempt.
I’ll say it again – if you sell taxable items and have sales tax nexus, then you are most likely required to collect sales tax from buyers in your nexus state.
Myth #2: I only have to worry about collecting sales tax in my home state
This is one of those myths that is sometimes true. A better way to say this, though, is that you only have to worry about collecting sales tax in states where you have sales tax nexus. You may only have sales tax nexus in your home state. But if you have business activities in other states, you could have nexus there, too.
Nexus-causing business activities include:
- A location
- Personnel
- Inventory in a warehouse
- An affiliate
- A drop shipping relationship
- Temporary sales (such as at a trade show or craft fair)
Doing any of the above in other states could give you nexus in those states as well. If you have nexus, you are required to charge sales tax to buyers in that state.
Myth #3: I paid sales tax when I bought a product for resale, so I don’t need to charge sales tax on it
This misconception comes from the mistaken belief that sales tax should only be charged on an item only one time. But that isn’t the case. If you are selling an item at retail in your nexus state, then you are required to charge your buyer sales tax on that item. This is true whether or not you paid sales tax when buying the item.
It helps to think of sales tax as a tax on the transaction rather than a tax on the item.
Fortunately, if you did pay sales tax for an item you intended to resale, you have alternatives.
- Use a reseller’s certificate – Many suppliers will accept a resale certificate from you. While every state is slightly different, in general you simply have to show that you are a valid reseller, describe the item(s) you are buying for resale, and affirm that you do intend to resell it. (Buying items with a resale certificate without the intention of selling them is considered fraud.)
- Claim the tax paid on your sales tax return – In most states, when you file your sales tax return, there will be a line item on the return where you can claim back any sales tax you paid for an item you later resold.
Myth #4: My Amazon store gives me sales tax nexus in a state, so I only need to collect sales tax from Amazon customers in that state
eCommerce sellers are increasingly going multi-channel. One of the most popular eCommerce platforms these days is Amazon FBA. FBA takes a lot of the grunt work out of online selling. But in exchange, FBA sellers are on the hook to collect sales tax in the states where their inventory is stored.
One persistent myth is that, since business activities associated with Amazon caused sales tax nexus in a state, a seller is only required to collect sales tax from their Amazon customers.
This is untrue. In the eyes of the states, if your business has sales tax nexus in the state, then you are required to collect sales tax from all buyers in that state. This is no matter if you sell to them through Amazon FBA, eBay, Shopify or your own website.
Myth #5: I don’t live in the U.S., so I don’t have to worry about U.S. sales tax
This myth is sometimes true. If you are an international seller and don’t have sales tax nexus in any U.S. states then it’s true that you are not required to collect sales tax.
But if you live outside the U.S., but have nexus-creating business activities in the U.S., then you are generally still required to collect sales tax from your buyers. When the states determine who has nexus, they aren’t concerned whether you live in the next state over or in an entirely different country. If they determine you have sales tax nexus, they want you to register for a sales tax permit, collect sales tax from your in-state customers, and file sales tax returns just like a U.S. based business.
I hope this post has squashed some sales tax myths for you! If you want to know more about sales tax, check out our Sales Tax 101 for Online Sellers Guide, or start the conversation in the comments!
Jennifer Dunn is Chief of Content at TaxJar, a service that makes sales tax collection, reporting and filing simple for more than 5,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!