Sales Tax Fundamentals
Get up to speed on the basics of sales tax
The most common sales tax questions, answered by the experts
byFebruary 14, 2022
Sales tax is a complex subject, so we gathered the experts from Cherry Bekaert and the Sales Tax Institute for a live Q&A session to address sales tax questions from sellers across the globe. In case you missed it, we compiled a recap here. And to catch up on all the questions asked and answered, watch the on-demand webinar.
What is sales tax nexus?
Sales tax nexus occurs when your business has some kind of connection to a state. All states have a slightly different definition of nexus, but most states have ruled that a “physical presence” or “economic connection” creates nexus. You only have to collect and remit sales tax in the states in which you have sales tax nexus.
Physical nexus includes these types of scenarios:
- Having an office, store or other location in a state (even a home office)
- Having an employee, salesperson, contractor, etc. in a state
- Owning a warehouse or storage facility in a state
- Storing inventory in a state (such as in an Amazon FBA warehouses or other 3rd party fulfillment center)
- Having a 3rd party affiliate in a state
- Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
Economic nexus entails making a certain amount of sales in a state (either a certain dollar amount or a certain number of transactions). These thresholds vary by state, check out the individual state laws here.
How does storing my inventory in an Amazon warehouse impact my sales tax compliance?
Sales tax has changed quite a bit for Amazon sellers over the past few years. As a result of the 2018 South Dakota v. Wayfair Supreme Court ruling, states were allowed to pass marketplace facilitator laws. These laws require that large online marketplaces like Amazon, Walmart, eBay, Etsy and others collect sales tax on behalf of 3rd party sellers selling on the platform.
But, as with anything sales tax related, there are a few caveats. Storing inventory in an Amazon fulfillment center still gives your business sales tax nexus and an obligation to collect sales tax from buyers in that state. However, since marketplaces collect on your behalf, you don’t have to worry about collecting sales tax in nexus states if you only sell on marketplaces. Some states, though, still require that you register for a sales tax permit and file sales tax returns, even if a marketplace collects on your behalf.
Important caveat: if you sell via Amazon in addition to making sales through your own online store, such as via Magento or Shopify, you are still required to collect sales tax in your nexus states from your buyers on those channels. Take a look at our marketplace facilitator guide for more information.
How do I know what I am selling is taxable? What’s the correct sales tax rate?
This is a tricky part of sales tax compliance. Product taxability laws vary by state, so what is taxable in Georgia might not be a taxable item in Hawaii. However, most tangible personal property falls under taxable sales. There are certain items that are often tax-exempt or taxed at a lower rate, like groceries and prescription medicine.
Sales tax rates also vary by state. Even more, rates change based on city, county, and jurisdiction. TaxJar helps ensure sellers are collecting the right amount of sales tax on the products that are taxable, and excludes those that are not. Try a free 30-day trial with TaxJar today.
What are the state sales tax requirements when shipping to customers?
Like almost everything else in sales tax, the laws around taxability of shipping charges you pass along to your customers is not universal. Some states say it’s taxable. Others say it’s not. It also depends on whether you include the shipping costs as part of the order. Here’s a complete list of where shipping is considered taxable.
I’m an international seller located outside the U.S., but I make sales in the U.S. and have economic nexus in a few states. What are my sales tax responsibilities?
Any seller – no matter where they are located – who makes a certain dollar amount of sales in a state, or a certain number of transactions with buyers in that state, are required to collect sales tax. So even if you are a remote seller who isn’t physically in the U.S., you still need to be aware of economic nexus laws and register with the necessary states to be compliant. The good news is that TaxJar can help. With TaxJar’s AutoFile, international companies can use automation to file their U.S. sales tax returns. You can find more information on using TaxJar as an international company here.
When should you register for a sales tax permit?
This question comes up frequently at TaxJar. You only need to collect sales tax in the states in which you have nexus. And you cannot legally collect sales tax from a customer until you register for a sales tax permit. With all that in mind, we recommend that you register for a sales tax permit in these scenarios:
- When your business is based in a state
- When your business has physical presence in a state
- When your business has economic nexus in a state
When you are ready, here’s a list of how to register for a sales tax permit with each state’s Department of Revenue.
What are the biggest audit triggers?
We recently interviewed Connie Zoerink, CPA, a State and Local Tax (SALT) expert at the tax advisory firm TaxOps (and a TaxJar Partner). According to Zoerink, these are the top five reasons companies are audited:
- Announcements or press releases that feature big product announcements or changes
- Earning revenues that don’t line up with a company’s industry
- A previous audit
- Making misleading statements around registration
- Acquisitions and raising funding
A sales tax audit might seem daunting, but with the right preparation, it doesn’t have to be. Check out our free sales tax audit guide for helpful tips.
Still have questions?
If you are looking for even more sales tax information, the TaxJar blog is a great place to start. You’ll find state specific legislation, product taxability articles, and sales tax content for businesses in all industries. To catch up on all the FAQs, watch the TaxTalk webinar on-demand.