The U.S. has no national sales tax, it means each state governs its own tax. Forty-five U.S. states and Washington D.C. all have a sales tax. The tax collected is used for budget items like schools, roads, and public safety. This is referred as a consumption tax as it’s only charged when a buyer buys goods and services.
As each state has its own rules and rates for the sales tax, it has been seen different taxes all over the U.S. There are some categories of products taxable in one state while the same categories are exempted in another state. i.e Groceries. The same with shipping, in a few states tax, is being levied on the shipping of products whether in other states no tax on shipping.
Following are some of the sales aspects that vary from state to state which includes: –
- What are the taxable services and products?
- How much sales tax is charged?
- How often online sellers are required to file their sales tax returns?
- Dates on which sales tax returns are due?
Is Your Business Eligible to Collect U.S. Sales Tax?
In case if your business has a significant presence in that state in the U.S. you are required to change sales tax. Following are certain factors that helps you understand the nexus in the state.
- Your Physical Presence –Home, office, warehouse, store address of your business.
- Personnel – how much is your manpower strength right from Employees, salespeople, and even some contractors that can establish nexus.
- Affiliates – Someone who sends customers to your online store for a percentage of the profits from a sale.
- Drop-Shipping services–Building a fruitful relationship with your supplier to ship your inventories. Selling items at a trade or craft show
- Inventory – In case if your store goods are for sale in a state, sales tax nexus is usually applicable. If you’re a seller who makes use of third-party fulfillment services like Amazon FBA, you’ll generally have sales tax nexus in states where your products are stored for sale.
Like U.S. sellers’ International sellers too need to collect sales tax when they do merchandise in the U.S.
How Does an International Seller Know The Need to Collect U.S. Sales Tax?
You are liable to collect sales tax if your business has sales tax nexus in that state. There are scenarios where non-U.S. sellers may have nexus in the United States.
- Non-U.S. citizens who are running a business in the U.S.
- If you live outside the U.S. but have sales tax nexus in a U.S. state
- If you live outside the U.S. and have no sales tax nexus in the U.S
Register For Sales Tax:
If you are eligible to collect the sales tax then you must register for sales tax with the Department of Revenue of that state. To get register for sales tax keeps below information handy:
- personal contact information
- business contact information
- Social security number (SSN) or Federal Employer
- Identification Number (FEIN) also known as Employer Identification Number (EIN)
- Your business entity (sole-proprietor, LLC, S-Corp, etc.)
- NAICS Code (Hint: The NAICS code for online stores is 454110)
Once you register for sales tax your tax filing frequency will be monthly, quarterly, or annually.
There are many tangible products that are taxable such as furniture, jewelry, toothbrushes, coffee mugs, etc. However, these items considered to be “necessities” and may not be taxable in some states. Also, in some states clothing is also not taxable although luxury clothing is taxable even in such states.
Below is the list of common items that may not be taxable in some states:
- Grocery food
- Certain books (textbooks, religious books, etc.)
- Prescription and nonprescription medicine
- Magazines and subscriptions
- Digital products (books, music, movies, etc.)
If the items you are selling are not taxable, then you are not required to collect sales tax on those items. In the U.S. an identical product may be taxable in one state, and in another state, it may be non-taxable. Also, a product may not be taxable at the state level but may still be taxable at the local level.
If your business has sales tax nexus in a state, then you are required to collect sales tax from ALL buyers in that state on ALL your sales channels.
In the U.S. states require online sellers to collect sales tax in one of two ways:
- Origin-based sales tax collection: Online sellers who are based in states with origin-based sales tax sourcing are required to collect sales tax at the seller’s business location.
- Destination-based sales tax collection: Online sellers who are based in states with destination-based sales tax sourcing are required to charge the sales tax rate at the buyer’s “ship to” address.
Following is an example of a sales tax filing scenario for an online seller:
Smith has sales tax nexus in three states: Georgia, California, and Maine.
- His Georgia sales tax returns are due every month by the 20th.
- His California sales tax returns are due every quarter on the final day of the month.
- His Maine sales tax returns are due annually on the 15th day of the month.
In eCommerce, the point of sale is generally your buyer’s “ship to” address. You must follow sales tax rules and laws in the state where your buyer is located. You are not allowed to charge a customer another state’s sales tax.
Tax On Shipping:
In the U.S. every state has its own tax rule on shipping. In some states, shipping is considered as a necessary part of an eCommerce merchandising, and the state requires that you charge sales tax on the amount you charged for shipping. However, in other states, shipping is considered a separate charge and is not considered taxable.
Dropshipping And Sales Tax:
Dropshiping is a cost-effective business model. In this model, you have your vendor to ship items directly to the customer. This model is somehow complicated to collect the tax. If your vendor has nexus in your state, then they will be required to charge you sales tax on that purchase and you shall present a resale certificate to them so that you are considered to resale that items. If your customer is in a state where you have nexus, then you will have to charge sales tax to your customer.
Are You A Magento Based Ecommerce Merchant?
If you have your website running on the Magento platform then you shall know how to set up the taxes in Magento for the U.S. You can follow the below steps to get taxes configured as per your state in the U.S.
- In Admin Panel, click on stores > Settings > Configuration.
- Under Sales, Select Tax.
- In tax section select Tax Class for Shipping and choose None.
- Now Scroll down to the Calculation Settings section and allow calculating the tax on “Total” value of the order.
- Select Shipping Origin.
- Exclude tax from the Catalog Prices and Shipping Price.
- Allow US tax to tax include the discount amount by choosing “After Discount” in the Apply Customer Tax field.
- Allow US tax include the discount amount by choosing “After Discount” in the Apply Customer Tax field.
- Apply Discount on Prices field.
- Now Expand the Default Tax Destination Calculation section and set the Default Country to “United States”.
- Select your business location.
- Set Post Code to the number range according to your state
- In the Price Display Settings & Display shipping prices select Excluding tax.
- In Shopping Cart Display Settings workplace select YES in Include tax in total order, display full tax summary and Display Zero Tax Subtotal.
- In Expand Orders, Invoices, Credit Memos, Display Settings section select
- “Excluding Tax” from the display of Prices, Subtotal, and Shipping Amount.
- Set Include Tax in Grand Total, Display Full Tax Summary & Display Zero Tax Subtotal to “Yes”.
- In the Fixed Product Taxes workplace section set the option to “No” to approve the US tax.
We hope that the above guidelines work the best for you. We are a one stop shop for all your E-commerce requirement.