How to Charge Sales Tax
How to Charge Sales Tax
Sales tax is a percentage of a sale charged at the point of sale. It’s charged by the retailer, paid by the buyer, and later remitted to the state (and sometimes local area) by the retailer. The state and/or local area uses the collected sales tax to pay for budget line items like hospitals and schools.
To put it plainly, states and local governments rely on sales tax. And they rely on retailers to collect the right amount of sales tax from every buyer, every time.
But, with e-commerce, it can be difficult to determine how much sales tax is the right amount to charge.
This article will detail how you can be sure to collect the right amount of sales tax while keeping the state and your customers happy with you.
How Sales Tax Rates Work
As a customer, you may have noticed that you pay 8.25% sales tax in one city, then you venture just a few miles away and only pay 6% sales tax. This is because of the way sales tax rates are set.
Each state sets their own statewide sales tax rate. This is generally anywhere between 4% and 7%. Then local areas, such as counties and cities, are allowed to levy their own sales tax rates. This is why you may pay more in sales tax within the city limits.
Last but not least, some areas also have special taxing districts. This is when a group of localities band together to pay for a big items like a school system, an economic development district or a public transit project. A good example of this is the New York Metropolitan Commuter Transportation tax, where many counties and cities levy a sales tax to pay for public transit.
Let’s look at an example sales tax rate:
|Locality||Sales Tax Rate|
|New York (state)||4%|
|Dutchess County (county)||3.75%|
|Transit tax (special taxing district)||.38%|
When you break it down, it’s clear how each percentage of sales tax collected goes to the state, locality or special taxing district.
What isn’t so clear is how to handle charging sales tax as an e-commerce retailer.
Sales Tax Exemptions
Do you sell groceries, clothing, supplements or digital goods? These are just some of the items that are taxed differently by state.
Groceries are non-taxable in many states. In other states they are taxable, but at a lower state rate. Though, in those states, local areas generally still levy their full tax on grocery items.
Clothing is taxable in most states, but some states don’t tax clothing. And some of those states don’t require sales tax on clothing as long as the clothing item sells for less than a certain amount. (Ex: Clothing selling for less than $110 in New York and $175 or less in Massachusetts is non-taxable.)
Digital goods like e-books, movies and music are taxable in some states and non-taxable in others.
As an e-commerce retailer, you’ll need to understand whether or not your products are taxable in each state in which you have a sales tax nexus.
If you have questions, HOST can help you create a custom taxability matrix to ensure you are (and are not) collecting sales tax on your items that vary in taxability by state.
Sales Tax on Shipping Charges
Unlike most brick and mortar transactions, e-commerce sales generally include shipping. And many states even require sales tax on shipping charges!
Their reasoning is that the shipping is an important part of the sale since the customer might not be able to take possession of the purchased item otherwise. In fact, some states require e-commerce retailers to charge sales tax on shipping charges except when the buyer has the opportunity to take possession of their new product without shipping.
Other states don’t require e-commerce sellers to charge sales tax on shipping charges.
Product taxability also comes into play when deciding whether to charge sales tax on shipping. Generally, in states where shipping is taxable, if the item shipped isn’t taxable, shipping also isn’t taxable. But if you’re shipping multiple items, you’re generally required to divide the shipment and charge sales tax on the portion of shipping rate that applies to the taxable item.
Charging Sales Tax FAQ
When can I not charge sales tax?
E-commerce retailers are required to charge sales tax on all transactions, but with exceptions.
If you don’t have a sales tax nexus in a state, then you aren’t required to collect sales tax from buyers in that state. If you sell an item that isn’t taxable in a state, you aren’t required to collect sales tax on that.
If you are selling to another retailer, and that retailer provides you with a valid resale certificate, then you’re not required to collect sales tax from that buyer. You’re also not required to collect sales tax from government entities and some nonprofits. They have to, of course, provide you with proper documentation.
What happens if I accidentally charge the wrong amount of sales tax?
With more than 14,000 taxing jurisdictions in the United States, it can be incredibly easy to collect the wrong amount of sales tax.
If you collect too much, it’s best practice to refund the sales tax to the customer. But if that isn’t possible, you need to at the very least be sure to remit the excess sales tax to the state along with your next sales tax filing.
If you collect too little, the state will require that you make up the excess out of pocket. Since e-commerce is often a low-margin effort to begin with, that’s why it’s so important that you collect the right amount of sales tax from the beginning. This will allow you to avoid cutting into your profits by paying uncollected sales tax.