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A Quick Guide for Online Sellers on How The US Sales TAX Works

Friday, January 17, 2020

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The United States has one of the most complicated sales tax systems in the world, The sales tax is governed at the state level and no national general sales tax currently exists. With 45 states (and Washington, D . C . ), over 10,000 sales tax rates, and a lot of variabilities, it can be tough for online sellers to wrap their heads around how sales tax works. This guide will explain the basics of U.S. sales tax so online sellers aren’t completely familiar with the United States Sales Tax


What is the US Sales Tax? 
In the United States, the sales tax is a consumption tax that is theoretically only charged once, at the final purchase of the final product by the end consumer. 

The US sales tax is not a nationwide policy, such as VAT throughout the European Union or GST in Australia. Rather than administered on a federal level, US sales tax exists both at the state and local levels. States and local jurisdictions have the power to set their tax laws and tax rates. 

45 states and the District of Columbia collect statewide sales taxes. (Alaska, Delaware, Montana, New Hampshire, Oregon do not have any sales tax at all!) 

38 states have some forms of local sales tax, collected in part or all of the state. 

The result is that there are thousands of taxing jurisdictions in the United States. And within those states and local jurisdictions, several other factors determine whether your business is liable or not. 


State sales tax rates differ. 

Each state’s sales tax rate generally varies from two to six percent. Some states only have a single statewide sales tax rate. For example, the sales tax rate in Connecticut is 6.35 percent. If you were to walk into a store and buy a taxable item anywhere in Connecticut, you would pay the 6.35% sales tax rate. 

However, most states allow counties, cities, and other local areas to levy a sales tax, too. Which is why you would pay six percent sales tax when purchasing an item in the Atlanta suburb of Kennesaw, Georgia. However, if you drive into nearby Atlanta and buy that same item, you would pay 8.9 percent in sales tax. 

This is where collecting sales tax can get especially tricky for online sellers. In e-commerce, the point of sale is considered the place where the buyer takes possession of the item, generally their house or workplace address. As an online seller, it is your responsibility to know the sales tax rate for your buyer’s shipping address. 


Taxable Items 

Sales taxes are imposed only on taxable transfers of goods or services. The tax is computed as the tax rate times the taxable transaction value. Rates vary by state, and by locality within a state. Not all types of transfers are taxable. The tax may be imposed on sale to consumers and businesses. 

Clothing is not taxable in Pennsylvania, textbooks are not taxable in Kentucky, and groceries are not taxable in most states. (As opposed to “prepared food,” which is usually taxable.)  

In other cases, these items are taxed at a different or reduced rate. For example, in Illinois, groceries are taxable at a reduced rate of one percent. In New York, clothing items priced at $110 or less are nontaxable.  

Fortunately, for retailers, most point-of-sale software, online shopping carts, and marketplaces allow you to set a product tax code or tax class. So you do not inadvertently charge too much sales tax to a buyer in a state where a product is tax-exempt or taxed at a reduced rate. 


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Shipping charges are sometimes taxable 

This is another area where sales tax can get tricky for online sellers. Some states consider a shipping charge to be an integral part of a sale, and thus taxable. In their eyes, if you are an online seller, then you must ship the item to your buyer to get it to them, so shipping is part of the sale. 

Some states consider shipping charges non-taxable since they are separate from the price of the item. As an online seller, you need to know if your state considers shipping charges taxable. But once you’ve figured that out, your point-of-sale software, online shopping cart, or online marketplace will allow you to set whether you want to charge sales tax on shipping charges. You can avoid having to keep all that straight by offering free shipping. 


Sales tax filing due dates differ from state to state. 

Remember how states all have different rules for sales tax? Never is this more clear to retailers than when it comes time to file their sales tax return. 

In most states, sales tax is due on the 20th day of the month after the taxable period ends. However, plenty of states break from that rule: Sometimes sales tax is due on the 15th of the month, the last day of the month, or some other date. 

In most states, sales tax is due on the 20th day of the month after the taxable period ends. However, plenty of states break from that rule: Sometimes sales tax is due on the 15th of the month, the last day of the month, or some other date. 

The frequency at which you are asked to file a sales tax return and remit sales tax also varies from state to state. As a rule, the more revenue you make from buyers in a state, the more often the state wants you to file and pay sales tax. States use sales tax revenue to pay for budget items like schools, roads, and public safety, so they want as much sales tax in their treasuries as quickly as possible.  



Sales tax is usually due either monthly, quarterly or annually, with high-volume sellers paying monthly and the smallest-volume sellers required to file and pay only once per year. In keeping with the tradition of every state doing sales tax, it's way, some states have other frequencies, such as “semi-annual” or “fiscal annual” frequencies. 



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