This post was written by Jennifer Dunn at TaxJar. TaxJar is a service that makes sales tax reporting and filing simple for sellers.
Q4 is here, and that means that online store owners are looking for ways to maximize every minute of their valuable time. One thing you don’t want to have to troubleshoot is sales tax. Take these preventative steps now to ensure a hassle-free holiday season – at least when it comes to sales tax trouble.
Ensure You’re Collecting Sales Tax in the Right States
In the U.S., only sellers are required to collect sales tax in states where you have sales tax nexus. Sales tax nexus is just a fancy way of saying a significant connection to a state. Here are factors that commonly create nexus for a business:
- You live and/or operate your business in that state – you’ll always have “home state nexus”
- You have inventory for sale stored in that state
- You have an employee, contractor, sales person or other personnel in that state
- You have a store, warehouse or other business location in the state
- You use 3rd party affiliates based in that state
If your business has changed over the past year, you may have sales tax nexus in a new state. If you do find that you have nexus, your next step is register for a sales tax permit in that state, and begin collecting sales tax from your buyers in that state. If you have questions about nexus and your obligations, we recommend speaking with a sales tax professional.
Ensure You’re Collecting Sales Tax only on Taxable Items
In the U.S., sales tax rules and laws vary from state to state. This includes laws about what items are taxable. While most “tangible personal property” (like furniture, toothbrushes, electronic gadgets, etc.) are taxable, some items that are considered “necessities” are not.
For example, clothing is not taxable in Pennsylvania, textbooks are not taxable in Kentucky, and grocery items are not taxable in most states. To make matters more complicated, sometimes items are taxable, but at a reduced rate or only if they are priced at over a certain threshold. (Ex: Clothing priced at $110 or less is not taxable in New York, but clothing priced over $110 is.)
Fortunately, most online shopping carts and marketplaces allow you to classify product categories so that you don’t accidentally collect sales tax on non-taxable items. Double check that you’re taxing items correctly, otherwise you may end up with an unhappy customer who shouldn’t have had to pay sales tax on her order from your online store!
Double Check Sales Tax on Shipping Charges
If you charge shipping to your online customers, you may be on the hook to collect sales tax on those shipping charges. More than half of U.S. states consider shipping to be a taxable part of a sale to your customer, since in order for the customer to receive the item it had to be shipped.
You sell a fancy lamp to a customer for $300, plus $10 in shipping. In most states, the total taxable transaction would be $310. However, in the U.S. states where shipping is not taxable, you’d only charge your customer sales tax on the $300 price of the item.
Most online shopping carts and marketplaces allow you to specify whether to charge sales tax on shipping in a state. Failing to charge sales tax on shipping charges could mean that you owe the state sales tax collector tax out of your pocket. On the other hand, if you offer free shipping, you can avoid this problem altogether!
You can see a list of states that require sales tax on shipping here.
Note this if you Offer Gift Wrapping Services
Many online sellers go the extra mile and offer gift wrapping services to their customers during the holidays. Similar to shipping charges, some states consider gift wrapping services a taxable charge, while others do not.
If you offer gift wrapping services, double check this list of states where gift wrapping is considered taxable to determine if you should charge your customers sales tax on this extra service.
Ensuring you’re collecting the right amount of sales tax from the right customers now can prevent sales tax hassles later own down the line. These tax tips will help you ensure you have a stress-free holiday season.
Shippo is a multi-carrier API and web app that helps retailers, marketplaces and platforms connect to a global network of carriers. Businesses use Shippo to get real-time rates, print labels, automate international paperwork, track packages and facilitate returns. Shippo provides the tools to help businesses succeed through shipping.