Sales tax is complicated, more complicated than it needs to be. How about a harmonized sales tax whereby every jurisdiction in the country collects the same rate on the same goods and services? If states want to reallocate among jurisdictions within their borders they are free to do so.
Here is a look at how complicated it can get. These are some of the main considerations when deciding whether to collect sales tax.
First the basics for a brick and mortar business where actual customers walk in and purchase products or services:
- Who are you selling to? Some customers are tax exempt.
- What are you selling? Some goods and services are tax-exempt all the time. Some have special tax rates, like fuel and cell phones.
- When are you selling? Some jurisdictions have tax holidays… like for back to school.
- Where are you selling? Different jurisdictions have different rates. They can be set at the city, county, and state levels. Some have special tax zones that span jurisdictions. Some zip codes are even split between two tax jurisdictions.
- How much does it cost? Some jurisdictions only tax higher-priced items of the same kind… clothing under $100 may be tax-exempt.
It gets more complicated when you are selling online; which is commonly referred to as a remote seller.
- Physical Presence: All of the above rules still apply, even when selling online. Physical presence is determined by an office, warehouse, employees, and some related parties located in the state.
- Economic Nexus: If you sell above a certain amount in terms of dollar value or number of transactions into the state.
- Affiliate Nexus: If you have a 3rd party marketing and selling to customers on your behalf. Note: there are exemptions for when the marketing is limited to links to your website.
- Cookie Nexus: Some states require you to collect sales tax if you place cookies on user’s computers in the state.
- Marketplace Facilitator and Marketplace Seller: Think Amazon, eBay, and Etsy where different sellers list their products for sale on a platform (the marketplace).
There are more details than a business can rightly be expected to manage on its own. In some states, visiting a trade show for 2 days during the year would create nexus. Drop shipments have a whole host of other rules. For more info, check out this great resource Avalara put together.
