Author Archives: Mark Faggiano

How US Sales Tax Works

Author: Mark Faggiano  |  November 8, 2017

When selling online you should understand the laws around sales tax throughout the United States. From products to shipping costs, there are rules and regulations around taxes that differ from state to state and item to item. Our partner, Tax Jar, has written a piece to share their sales tax expertise.


coins-currency-investment-insuranceFor a variety of reasons, the United States has managed to build one of the most complex and downright confusing sales tax systems in the world. And as an online business owner, it’s important that you wrap your head around this system so you can at least keep your head down and collect the right amount of sales tax from the right customers.

This quick sales tax 101 guide will explain the ins and outs of U.S. sales tax for online sellers so you can get back to doing what you do best – running your eCommerce business.

Sales Tax is Governed at the State Level

It’s a common misconception that all tax in the U.S. is administered by the IRS. In fact, the U.S. has no federal level sales tax, and no overarching governing body. Instead, sales tax is governed at the state level.

This means that each state gets to make their own rules and laws about things like sales tax rates, which merchants have to collect sales tax, and what items are taxable. It also means that as an online seller, if you have to deal with sales tax in more than one state, you’ll probably find that each state is quite different.

Online Retailers Don’t Always Have to Collect Sales Tax in Every State

One thing online retailers are often surprised to learn is that they aren’t generally required to collect sales from every buyer. Instead, in the U.S., online sellers are only required to collect sales tax in states where you have “sales tax nexus.” Sales tax nexus is just a legalese way of saying “obligation to collect sales tax in a state.”

Each state gets to decide what creates nexus. Common factors that create nexus are having a location, employee or inventory for sale in a warehouse in a state. You can read what each state says creates sales tax nexus here.

Sales Tax Rates Vary from Place to Place

Sales tax is a percentage of a sale that is collected by a retailer and then remitted to a state (and sometimes local areas). Those state and local governments use sales tax to pay for budget items like schools, roads, and fire departments.

Sales tax rates vary from state to state and between local areas.

States set a statewide sales tax rate. Then most states allow local areas – cities, counties and other special taxing districts – to also set a sales tax rate. This means that most areas have a combination of several sales tax rates.

To see how this breaks down, let’s look at the sales tax rate in Marion, Illinois:

6.25% Illinois state sales tax rate

1% Williamson County sales tax rate

1.5% Marion city sales tax rate

8.75% combined total sales tax rate

In other words, if you were buying a toothbrush in Marion, Illinois, you’d pay 8.75% in sales tax on your purchase.

Though there are a few exceptions, as an online seller, you generally charge your buyer sales tax at the sales tax rate of their ship to address. (I.e. if you sold that toothbrush to the buyer in Marion, Illinois, you’d collect 8.75% in sales tax from them.)

Product Taxability Varies from State to State

In the U.S., most “tangible personal property” is taxable. But there are some exceptions, which can vary from state to state. Items like groceries, clothing, medical supplies and textbooks, among other things, are sometimes nontaxable in some states.

For example, clothing is not taxable in Pennsylvania, textbooks are not taxable in Kentucky, and groceries are not taxable in most U.S. states.

Things can get even more complicated. For example, clothing in New York is non-taxable, as long as it’s priced at $110 or less. And while the New York statewide sales tax rate is not applicable clothing priced under $110, some local areas still consider clothing taxable. As another example, groceries in Illinois are taxable, but only at a reduced rate of 1%. Fortunately for online sellers, automated sales tax collection engines can take all these state rules and laws into account so you don’t have to worry about accidentally charging sales tax to the wrong customer in the wrong state on the wrong item!

Shipping Charges are Taxable (Usually)

As an online seller you, of course, get your items to your customers by shipping them. And many online sellers charge a small fee for shipping. It’s important to note that more than half of U.S. states consider shipping to be a taxable charge.

Let’s say you sell a Nintendo Switch for $300 plus $10 in shipping to a buyer in a state like Michigan, where shipping charges are taxable. You’d be required to charge your buyer sales tax on the entire transaction cost – $310.

But say you sell that same Nintendo Switch for the same price to a buyer in a state like Missouri, where shipping charges are not taxable. In that case, you’d only be required to charge sales tax on the $300 item price and not the $10 shipping charge.

You can see which states require sales tax on shipping here.

Sales Tax Administration Varies from State to State

If you deal with sales tax in more than one state, you’ll probably notice many differences from state to state. However, there are a few general rules of thumb.

First, most states want you to file sales tax returns either monthly, quarterly or annually. (Though some will want to hear from you semi-annually or on a fiscal annual basis.)  Usually, the more sales tax you collect from buyers in a state, the more often the state will want you to file and pay sales tax.

States also set their sales tax deadlines on different days of the month. While more than half of the states set the sales tax filing deadline on the 20th of the month following the taxable period, others have due dates on the last day of the month, the 15th, the 23rd, or some other date.

And about half the states with a sales tax even provide sales tax discounts to filers who file and pay on time. This means states will let you keep a small percentage (usually 1-2%) of the sales tax you collected from customers. It’s free money!

I hope this post has helped you wrap your head around the sales tax system in the U.S. For a whole lot more about U.S. sales tax, check out our Sales Tax 101 for Online Sellers guide, or start the conversation in the comments!

TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers.  Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!


About the Author

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Mark Faggiano is the Founder and CEO of TaxJar – a service that automates sales tax compliance for over 5,000 eCommerce businesses. Mark has built a career around his passion for using technology to solve complex problems that hamper growth for small businesses. He previously co-founded and grew FileLater to become the web’s leading tax extension service for both businesses and individual taxpayers before it was acquired in 2010.

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Are you Charging the Correct Amount of Sales Tax?

Author: Mark Faggiano  |  July 5, 2016

Calculating and understanding sales tax can be a bit complicated especially for those selling to customers throughout multiple states or countries. So, we have invited Mark Faggiano, Founder and CEO of TaxJar, to shed light on how you can ensure you are charging the correct sales tax. 


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We talk to tons of online sellers, and one of the most common question we see when it comes to collecting sales tax is: “Wait, am I doing this right?”

We get it. Figuring out which sales tax rate to charge your customers can be complex. Not to mention, there are probably 19 other things on your to do list ahead of “Make sure I’m not totally screwing sales tax up.”

This quick guide will explain why sales tax is charged the way it is in the U.S., and how to make absolutely certain you’re charging your customers the correct rate.

Sales Tax 101

Forty-five U.S. states and Washington D.C. have a sales tax. Merchants with sales tax nexus in a state are required to collect sales tax from their buyers in that state and remit the fund back to the state. From there, those funds are used to pay for budget items like roads, schools and public safety.

What Makes Up a Sales Tax Rate?

You’ve probably noticed in your day-to-day life that sales tax rates vary from place to place, even within a state or county. A few factors make up your standard sales tax rate:

State sales tax rate – Each state with a sales tax has a statewide sales tax rate, generally ranging from 4-8%. About 10 states stop there and only have a statewide sales tax rate for the whole state. But most states also have…

globe-usa-1309894-1279x978County and city sales tax rates – Cities and counties want money to fund budget items, too, so in most states they can also require merchants to charge a sales tax. City, county and other local rates are added on to state rates.

Example: The sales tax rate in Norfolk, Nebraska is 7.5%. That’s the 5.5% Nebraska state sales tax rate plus the 2% Norfolk city sales tax rate. (Madison
County, where Norfolk is located, does not have a sales tax.)

Special taxing districts – Sometimes several local areas will be part of a “special taxing district.” This generally occurs when a big project – like a public transit system – will affect multiple localities. One example is the “Metro Commuter Transit District (MCTD)” which encompasses New York City and 7 New York counties.

Example: The sales tax rate in Suffern, NY is a combined 8.375%. That’s the 4% New York state rate, the 4% Rockland county rate, and the .375% MCTD (special taxing district) rate.

Check out TaxJar’s Sales Tax Calculator to look up a sales tax rate for yourself.

Sales Tax Sourcing Rules

“Sourcing” is where sales tax gets tricky for eCommerce sellers. There are two main types of sourcing rules, and states fall into either category:

Origin-based sales tax sourcing – In origin-based states, if you are based in the state and not considered a remote seller, then the rules say you collect sales tax based on the total sales tax rate at your business location.

Destination-based sales tax sourcing – Most states are destination-based states. In destination-based sales tax states, the rules say that you should charge sales tax based on the combined rate at your buyer’s location. By now you know how tricky this can get, with all those different city, county and special taxing district rates playing their part. Two towns that are 10 miles apart can have vastly different sales tax rates.

All states fall into either the origin-based or destination-based category, with the important exception of California, which is a “modified-origin” state. (You can read more about California sales tax here.)

For eCommerce sellers with sales tax nexus in multiple states, it’s important to note that if you are considered a “remote seller” (not based in a state) then you are required to use destination-based sourcing even when selling into origin-based states. Again, there are exceptions in California, Arizona and New Mexico.

Sales tax sourcing rules can be tough to wrap your mind around, so we wrote a whole post about Origin vs. Destination-Based Sales Tax States.

Product Taxability

As if this weren’t confusing enough, there’s also the fact that some products aren’t taxable in some states. Or some products are taxed at a different rate in some states.

For example, in Illinois grocery items are taxed at a reduced rate of 1%. In many other states, grocery items are not taxable at all. In New York, clothing under $110 is exempt from sales tax. But clothing is taxable in most states.

Each state will have differing rules about which products are taxable and tax exempt.

Shipping Taxability

Then there’s the matter of shipping. Some states consider shipping charges part of the total sale, and thus taxable if the sale is taxable.

Other states do not consider shipping a part of the total sale as long as the shipping charge is separately stated on the invoice.

Still other states, like Virginia, consider shipping non-taxable except if shipping and handling are combined – then the whole charge is taxable.

Confusing, right?

How Can I Collect the Right Amount of Sales Tax?

In the past, it has been up to you or your shopping cart to ensure you’re collecting the right amount of sales tax from your customers all the while following sourcing and product and shipping taxability rules. What a hassle.

TaxJar’s SmartCalcs sales tax API takes care of all that hassle – and it’s absolutely free for Magento merchants!

No matter if you have nexus in multiple destination-based states, or sell a product that is taxable in some states and exempt in others, TaxJar has your back.

Check it out for yourself with a 30-day-free trial.

There’s a whole lot more to sales tax than just charging the right rate. For more info, check out our Sales Tax 101 for Online Sellers guide. Or start the conversation in the comments!

TaxJar, a Magento Premier partner, is a service built to make sales tax calculation, reporting and filing simple for eCommerce sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!


About the Author

Screen Shot 2016-07-05 at 17.28.12

Mark Faggiano is the Founder and CEO of TaxJar – a service that automates sales tax compliance for over 5,000 eCommerce businesses. Mark has built a career around his passion for using technology to solve complex problems that hamper growth for small businesses. He previously co-founded and grew FileLater to become the web’s leading tax extension service for both businesses and individual taxpayers before it was acquired in 2010.

Link to full article