Here’s What You Need to Know About When and Where You Should Collect Sales Tax

Each state has its own sales tax rules and requirements, and within each state, multiple cities and municipalities have their own sales tax rules, for a total of more than 13,000 sales tax jurisdictions.

Luckily the answer to “Do I need to collect sales tax in every state or jurisdiction” is likely no.

So when do you need to collect sales tax, and more importantly, how do you know that you need to collect sales tax? We’ll break it down for you.

Do I Need to Collect Sales Tax in Every State?

Your business doesn’t need to collect sales in tax in every state because not every state collects sales tax.

5 US states are sales-tax-free:

1. Alaska
2. Delaware
3. Montana
4. New Hampshire
5. Oregon

The remaining 45 states, plus Washington, DC, collect sales tax. Of those 45 states, 38 allow cities, counties, and municipalities to collect tax, too.

How to Figure Out If You Need to Collect Sales Tax in the Other States

You can determine if you need to collect sales tax in a state based on your business’s connection to that state. Before 2018 and South Dakota v. Wayfair, your business needed to have a physical presence in a state before it had to collect sales tax.

After South Dakota v. Wayfair, businesses with an economic nexus in a state can be required to collect tax.

Physical Presence

It can be easy enough to figure out if your business has a physical presence in a state. If your main office is in a particular state, your company has a physical presence there.

But physical presence can be more nuanced in a few states. In some cases, your business may have a physical presence if it stores inventory in a particular state, has a remote employee who lives in a particular state, or if you attend a trade show in a state.

In those cases, your company could have a physical presence and be required to collect sales tax from customers in those states.

Economic Nexus

South Dakota v. Wayfair kicked the door to economic nexus wide open. Now your business only needs to have a financial or transaction connection with a state to collect sales tax.

What that connection looks like varies by state. You may need to start collecting sales tax once your company surpasses a certain sales amount, such as $100,000 or $500,000, during a 12-month period.

Or, you may need to start collecting tax once your business has a certain number of sales, such as 200.

In a few states, it’s an either/or situation, meaning you can either have $X sales or X number of sales to trigger nexus.

No Nexus, No Tax Collection Required

There may be a few states where your business doesn’t have a physical presence and doesn’t reach the economic nexus threshold.

You’re not required to collect sales tax in those states. Your customers may have to pay the tax themselves, though.

Even though you’re not required to collect sales tax in states where you don’t have nexus, you can still choose to do so. Collecting the tax eases the burden on your customers in those states. Plus, if you use sales tax software, deciding to collect tax in states where you don’t have nexus is simple.

TL;DR: Do I Need to Collect Sales Tax in Every State?

In short: No.

Not all states collect sales tax and those that do require you to have a physical or economic connection, aka nexus.

How do you figure out where you need to collect sales tax? Our sales tax state guides can help. In each guide, we break down the nexus thresholds and let you know what items are always taxed and which are tax-exempt.

TaxCloud keeps your business sales tax compliant. Our software keeps track of your nexus status and collects sales tax once triggered.

We know sales tax is complicated, and you’ve got better things to think about. Trust us to handle your sales tax so you can focus on growing your business. Get in touch today!

Ecommerce Sales Tax in the USA

While the best thing about selling online is that it allows businesses to expand their customer base, all those far flung sales can also lead to significant tax complexity. Online businesses don’t have to charge sales tax in states they’re not physically operating in until they’re considered to have achieved what’s known as ‘economic nexus’ in those states.

How does an ecommerce company achieve economic nexus?

They have to meet certain tax thresholds such as the number of sales or amount of total sales which vary from state to state.

Once a business has met those thresholds, it then has to calculate its ecommerce sales tax. But calculating sales tax for ecommerce companies can be complicated. Not only does each state have different sales tax rates but many have items that are exempt from sales taxes or taxed at a lower rate. So, how do you know you’re calculating the right online sales tax amount for each customer so you can ensure your sales tax compliance?

We’ll walk you through how to determine when you need to charge and calculate ecommerce sales tax, how to calculate it, and we even have a sales tax calculator to help you understand how online sales taxes work!

Do I need to collect sales tax for selling online?

Whether or not you need to collect online sales tax depends on whether your business has reached nexus – or connection –  in the states your customers are buying from.

If your business has a physical presence such as a store, office, or warehouse in a state, you’re typically required to collect sales tax for transactions within that state if that state has a sales tax. With the popularity of online stores, the definition of a sales tax nexus evolved beyond physical presence. Your store might not physically be in a state but you might have what’s known as ‘economic nexus’ there, depending on your sales revenue or transaction volume.

What qualifies you for economic nexus in each state varies. As an example, in North Dakota, you’ll reach economic nexus once you’ve sold $100,000 worth of goods to customers in that state. In Texas, however, you won’t reach economic nexus until you’ve sold $500,000 worth of goods to customers in that state. Kentucky calculates economic nexus slightly differently and requires businesses that have $100,000 in sales or 200 transactions in that state to collect sales tax.

That means that you have to keep track of your sales and transaction volume in every state to ensure your sales tax compliance. You can look up the requirements for each state here.

How to calculate sales tax

Whether you’re selling mugs with photos of your customers’ pets on them or replacement parts for microwaves, the steps for calculating sales tax are the same.

Here’s how to calculate ecommerce sales tax accurately and ensure sales tax compliance for your business:

Determine Nexus

As discussed above, understanding where your business has economic nexus that requires you to collect sales tax is the first step to calculating ecommerce sales tax. Once you know everywhere you need to collect sales tax, you can ensure that you’re properly charging sales tax to your customers.

Register for Sales Tax Permits

Once you determine where your business has nexus, you’ll need to register for sales tax permits with the respective states’ tax authorities. This typically involves submitting an application and obtaining a permit or license to collect sales tax within that state.

Categorize Your Inventory

Categorizing your inventory is required to properly calculate ecommerce sales tax. Some states make certain items tax-exempt or charge a lower sales tax rate on others. For example, diapers are tax-exempt in New York State whereas agricultural seeds are tax-exempt in Alabama. In Virginia, you’ll only need to charge 1% on things like personal hygiene products and groceries but you’ll have to charge the full sales tax rate of 5.3% on everything else.

If you only sell one type of item, categorizing your inventory will be easy. However, if you sell items across many product categories this step could become complicated – especially if you need to charge sales tax in many jurisdictions with different sales tax exemptions.

Calculate Sales Tax

Each state has its own sales tax rates, which might vary further based on local jurisdictions since some cities charge additional sales taxes. Integrate an ecommerce sales tax calculator tool or an ecommerce sales tax software that can accurately calculate the applicable tax rates for each transaction based on the customer’s location during checkout.

Many ecommerce platforms offer integrations with tax calculation services to streamline this process. For example, on Shopify, you can use TaxCloud’s Simple Sales Tax app to integrate TaxCloud directly into your online store. The right tech can make figuring out how to calculate sales tax for ecommerce stores so much easier.

Collect Tax Exemption Certificates

For those exempt from sales tax such as resellers or tax exempt organizations, consider offering them a way to purchase from you tax-exempt by collecting and maintaining valid exemption certificates to support tax exempt transactions.

Remit Collected Taxes

You’ll then have to remit your collected taxes and file your sales tax return with every state you collect sales tax in on a monthly, quarterly, or annual basis depending on the state and your company’s filing obligations. Be sure to pay attention to deadlines and reporting requirements for each state. Not sure where to find this information? Don’t worry – TaxCloud does a monthly blog series that lists the filing dates in each state so you don’t miss one.

Keep Detailed Records

Be sure to maintain accurate records of sales transactions, tax collected, exemptions, and any other relevant documentation. Record-keeping is crucial for audits or in case of any discrepancies.

Given the complexities and variations in sales tax laws across different states, using an automated sales tax calculation software like TaxCloud can streamline the process and ensure sales tax compliance with all relevant regulations.

TaxCloud’s Ecommerce Sales Tax Calculator

Understanding the ins and outs of sales tax can be overwhelming. To help you get started on what we’ve outlined so far, we encourage you to check out our interactive ecommerce sales tax calculator. While you can’t use it to charge tax in your online store, it’s great for those new to calculating online sales tax or for those who just want to learn more about how complex sales tax is.

Use it to look up your sales tax obligations in states where you have economic nexus or are about to reach it. Or use it to learn more about the sales tax thresholds of different states via our interactive map. We also share sales tax guides for every state! It has the answers to anything and everything you want to know about ecommerce sales tax.

What happens when a business doesn’t pay sales tax?

When your business fails to pay the required sales tax or pays the wrong amount because you calculated sales tax inaccurately, it can lead to a number of consequences that you very much don’t want. These consequences depend on the severity of your non-compliance. For example, if you failed to pay $100 in sales tax you’re not going to face the same consequences as if you failed to pay $1 million in sales tax. What happens will also depend on the jurisdiction’s tax laws.

Here are some potential repercussions:

Sales tax penalties and Interest

Initially, your business may face penalties and interest fees for late or unpaid taxes. These penalties can accumulate over time and can be subject to interest, significantly increasing the amount owed.

Sales tax fines and Liens

Tax authorities can impose fines or issue liens against your business’ assets. Liens can affect the business’s ability to obtain credit or loans or affect your ability to land large customers who might do a credit check before signing a contract with you. It could even lead to the seizure of your business’ assets to satisfy the tax debt.

Legal Action and Audits

If you continue not to pay or evade your sales tax obligations that could lead to legal action. Tax authorities could initiate audits to investigate financial records and practices. Audits aren’t just time-consuming, they can also be costly and lead to additional penalties if discrepancies or deliberate non-compliance are found.

Revocation of Your Business License

In extreme cases, continued non-payment or flagrant disregard for tax obligations can lead to your business license being revoked.

Personal Liability

If you run a small business or sole proprietorship that’s not incorporated, the business owner might be held personally liable for unpaid sales taxes. This can put your personal assets at risk.

Criminal Charges

Deliberate or severe cases of tax evasion can lead to criminal charges against the business or its owners, potentially resulting in fines, imprisonment, or both.

While that paints a pretty alarming picture, the good news is that not everyone who pays their ecommerce sales tax late or calculates their ecommerce sales tax incorrectly ends up in prison or has their business license revoked.

Still, no business wants to face sales tax compliance issues since they can quickly add up with fines, interest, and penalties. Businesses must prioritize tax compliance, keep accurate financial records, and address any tax issues promptly to avoid facing these repercussions.

Ensuring sales tax compliance with TaxCloud

Simplifying the process of calculating sales tax for ecommerce stores is what we do at TaxCloud. TaxCloud’s sales tax software is essential to ensure sales tax compliance and reduce the risk of errors when calculating and remitting sales tax.

Not only does TaxCloud integrate with your existing ecommerce platform (like Shopify, BigCommerce, WooCommerce, and more!) to calculate taxes for you but it keeps tabs on which states you’ve achieved economic nexus in – and which you’re about to.

Here’s how TaxCloud helps:

• Accurate Tax Collection: TaxCloud’s real-time sales tax calculator calculates sales taxes across over 13,000+ US jurisdictions to ensure your sales tax calculations are accurate, significantly minimizing the potential for errors in charging the correct tax amounts.
• Proactive Threshold Alerts: With TaxCloud, there’s no need to learn the complex economic nexus rules for each state yourself. TaxCloud’s software monitors thresholds and notifies you when you reach a point where registration and tax collection in a new jurisdiction are necessary.
• Notifications on Tax Responsibilities: Stay updated on your tax obligations, eliminating the risk of missing crucial filing deadlines. TaxCloud gives you notifications of when and where you need to file taxes – or we can even handle tax filing and remitting for you. 
• Effortless Tax Reporting: TaxCloud’s software generates comprehensive, ready-to-use sales tax liability reports for each jurisdiction. And it also recalibrates your sales taxes when returns are processed.
• Audit Support and Documentation: In the event of an audit, TaxCloud will help you! With the documentation you need and support from our team, you’ll have everything you need to navigate the process effectively.

Streamline your sales tax reporting and filing today with TaxCloud.

Reddit AMA Recap With TaxCloud’s Pat Riley

Pat Riley, TaxCloud’s VP of Business Development, recently hosted an Ask Me Anything (AMA) on Reddit, dishing out tips and support to help ecommerce and remote sellers cope with the sales tax landscape.

Before we get into a recap of the Q&A, we need to set the record straight: he’s not the Pat Riley who owns the Miami Heat.

Q: Any tips for ecommerce sellers who are just starting out?

A: First, always understand where your sales tax obligations are. You need to collect sales tax in any state where you have a physical presence (nexus) and where you have economic nexus, which is determined by the amount of business activity you conduct in a state.

Here are some other things to keep in mind:

• If you ship your product, see if the platform has built-in shipping and how that affects your taxes.
• Confirm how to manage exemption certificates, if applicable, in the states where you have nexus.
• Research if you need licensing in the states where you have nexus.
• You’ll also need to know sales tax at the local jurisdiction level, not just general state sales tax.
• Look into whether or not you qualify for flat-rate programs like the Alabama Simplified Sellers Use Tax (SSUT) program.
• Look out for special taxes beyond sales tax. For example, the Washington Business and Occupation (B&O) tax.
• Make sure you know your remittance deadlines. Each state has a different timeline for when they’re due that’s based on your registration. This can change if your sales go up.
• Many states are changing the economic threshold requirements. Make sure to monitor these. (The good news is that most are removing the transaction threshold so that it’s based solely on sales.)
• Depending on the state, sourcing (origin and destination of the sale), type of product, and your customer, you might not need to calculate sales tax (yet).
• You can easily remit sales tax returns with each state’s Department of Revenue online portal. Just know that it’s a separate portal for each state and they all require different information in different formats.
• Shipping taxability varies based on the shipping method. Do you charge shipping and handling or is it separated out? That can be the difference between charging tax or not.

Q: I do SUT audit defense, refunds, and compliance, but most of my work is in two states. Which states do you think have adapted to Wayfair’s best/worst? What did you do before Wayfair?

A: Since we’re in the sales tax compliance world, Wayfair didn’t affect us much. To be honest, it brought in more business.

However, we did see lots of confusion from merchants we work with. A lot of people understandably wanted quick advice. Some people went out and registered everywhere. Others didn’t want to register at all. We also saw an uptick in SST registrations.

Any state that has a seller’s use or simple program for out-of-state sellers has been the easiest to work with by far.

Q: What’s the best advice you have for remote sellers?

A: The first step is to understand where your sales tax obligations exist. You must collect sales tax in any state where you have nexus, whether physical or economic, which is determined by the amount of business activity you conduct in a state.

We have guides to sales tax nexus by state.

Q: How long would it take a regular 35-year-old Jane or John to have 80% of the sales tax domain knowledge as you?

A: The broad strokes of sales tax aren’t overly difficult to master. Things like nexus, who pays the sales tax, and what products/services are taxable are pretty easy to understand.

The complexities come from the variations in sales tax law among the 46 states that have sales tax. You get into product-based exemptions, buyer-based exemptions, rules around destination-based taxation vs. origin-based taxation, and much more.

Like anything, acquiring knowledge is a journey and sales tax is no different than anything else.

Thanks, Pat for your answers! And we agree, George Clooney would have been much better in the role In Winning Time!

Have more sales tax questions? We’ve got more answers. You can ask us anything anytime, just get in touch.

Sales Tax Audits 101

A sales tax audit is like a rite of passage. Your company will likely go through one at some point, even if you’re doing everything right. How stressful a sales tax audit is depends largely on how well you’ve prepared for it.

Remember, getting selected for an audit doesn’t reflect your business’s morals or character. In many cases, it’s just a state checking in to confirm you’ve dotted all your I’s, crossed all your T’s, and paid all the tax you owe.

Direct Audits

Your business may owe sales tax in a state where you have a physical presence or economic nexus (aka connection). If your business has no presence in a state, you’ll generally not need to collect or pay sales tax there.

It seems easy-peasy, but it’s not. States can have differing rules for physical presence and different thresholds for economic nexus. Mess one of those up, and a state may come a-knocking with a direct audit.

We’ve broken down all you need to know to get through a direct audit, including:

• How to prepare
• How to treat the auditor (be nice!)
• What documents you need
• What sampling is
• How to appeal
• What happens next

Streamlined Audits

The Streamlined Sales and Use Tax Agreement exists to make everyone’s sales tax lives a little easier, especially in a post-South Dakota vs. Wayfair world. Twenty-four states are full members of the Streamlined Sales Tax Governing Board and have passed legislation to make sales tax a little easier.

Some of the protections passed by Streamlined states include liability relief if a business doesn’t collect the right tax amount because of a data error from the state or an error made by certified sales tax software.

If your business uses TaxCloud, you get extra audit support in Streamlined states. We’re a Certified Service Provider (CSP), which means we have an agreement with each of the Streamlined states (and Pennsylvania).

Those states can audit our records to ensure we collect, calculate, and report the correct sales tax amount. Often, the audits occur on a three-year cycle, but only some states audit us every three years.

Since we’re the company getting audited in this case, your business may not need to get involved at all. However, there may be instances when we must contact you to get some information to make the audit go smoothly. We may need to request the following:

• Product mapping and descriptions
• Purchaser’s addresses
• Invoices
• Return records
• Exemption certificates

Having those documents and information handy and well-organized will help the audit go smoothly and may reduce the need for us to make a special request of your business.

TaxCloud Helps Ease Audit Pain

No one wants to be audited, but the process doesn’t have to be the stuff of nightmares. Using our certified sales tax software means you can be confident that the correct amount of tax is collected in each state for each transaction, reducing the risk of an audit.

And, thanks to the Streamlined Sales and Use Tax Agreement and our status as a CSP, your business has liability protections if an error in our sales tax calculations triggers the audit.

TaxCloud can be right by your side, keeping audits at bay or taking the heat for your business if an audit does occur. Contact us today to learn more.

How TaxCloud Goes to Bat for Your Business

You’re looking for sales tax software that takes the pain out of calculating, collecting, and paying sales tax. But, if you operate an ecommerce business that sells to customers across multiple states, you need much more than that. You need a support system to ensure you’re collecting the right amount of tax and that sales tax rules don’t burden your business too much.

TaxCloud gets it. We’re a sales tax compliance solution for growing online businesses. We want to help you collect and pay sales tax, sure. But we do more than that. We stand up for the little guy and work to make sure states don’t introduce laws or regulations that hurt your business.

Dave Steines, our Vice President of Government Affairs, breaks down how we go to bat for small businesses.

We Work With States on Your Behalf

In a world of bureaucratic red tape, it helps to have an in. Consider TaxCloud your business’s “in.” We have direct contacts with Streamlined Sales Tax (SST) and state personnel, which helps us help you resolve any issues accurately and quickly. We work with states to address outstanding concerns, such as missing or amended item returns, correct tax treatment of products, and audit assistance.

As a Certified Service Provider (CSP) with the SST program, we can manage state tax registration and renewals, exemption certificates, and sales tax filing for businesses that operate in an SST member state.

Our TaxGeeks are also actively advocating for online businesses. We participate in workgroups and committees with the SST to keep member states from changing the Streamlined Sales and Use Tax Agreement (SSUTA) in a way that negatively affects our merchants.

We get that sales tax can be overly complicated, and the rules can be all over the place. That’s why we’re working hard to push states to simplify things, to ease up the burden on you.

We’re Looking Out for Your Best Business Interests

Our TaxGeeks work hard behind the scenes to protect the interests of the online retailers who use our sales tax software. We work directly with states to ensure that Taxability Information Codes (TICS) are correct and accurate. Merchants rely on TICs to limit their sales tax liabilities.

South Dakota vs. Wayfair has had a massive impact on remote sellers, who now may have to collect sales tax in states where they don’t have a physical presence. We participated in a Wayfair Implementation Update Panel with the National Conference of State Legislatures (NCSL). We advocated for improving many areas where businesses struggle to comply. We also work with SST to reach out to non-member states, getting those states to pass provisions to reduce sales tax burdens and simplify the collection process.

We Show You the Money

What do we have to show for our hard work? A lot!

Following the Wayfair panel, where we showed that the 200-transaction threshold burdened small businesses, several states listened. Those states are stating to drop the transaction threshold from economic nexus requirements. Louisiana is a recent example of a state that dropped the transaction threshold.

TICs are meant to make it easier for merchants to tax or exempt products, but TICs can change frequently. Nebraska recently certified TaxCloud’s TICs, so you can rest easy that you’re correctly taxing sales to customers in that state. The change also provides liability relief to our merchants and TaxCloud in future audits.

Thanks to our efforts, several non-SST member states have taken steps to simplify sales tax filing. Pennsylvania has a CSP program and Connecticut, Illinois, and Missouri passed laws that allow a CSP to assist remote sellers.

You’ve got a growing online business to worry about. You don’t need to worry about sales tax, too. TaxCloud has you covered and is working hard to make sales tax regulations work for you. Get started with our software today.

Your Guide to Remote Seller Sales Tax by State

In the past, businesses typically needed a physical presence in a state before collecting and paying sales tax. Now, many states require companies with an economic nexus also to collect and pay sales tax. Companies with economic nexus are typically remote sellers. The what, where, and how of remote seller sales tax varies by state.

Not sure which states expect you to pay tax? That’s why we created this guide to remote seller sales tax by state.

What’s a Remote Seller?

Before we jump into each state’s rules for remote sales, we need to define what a remote seller is.

Remote sellers are businesses that don’t have a physical presence in a state (like an office or warehouse) but deliver services or products to customers in that state.

The exact definition of what a remote seller is varies by state. In Texas, for example, your business is considered a remote seller if you sell products or services. To qualify as a remote seller in Michigan, your business must sell tangible property.

Before the Supreme Court’s South Dakota vs. Wayfair decision, remote sellers typically didn’t need to worry about paying sales tax in states where they had no physical presence. Post-South Dakota vs. Wayfair, remote sellers can have economic nexus, meaning they may have a tax obligation.

Rules for Remote Seller Sales Tax by State: Sales vs. Transactions

Of course, states have different rules for remote sellers and sales tax. That would make things too easy.

Instead, each state has its own threshold rules for determining whether your company has economic nexus. Economic nexus can apply when your company reaches a threshold. In some states, that threshold is a sales amount, such as $100,000 in annual sales. In others, it’s a transaction number, such as 200 transactions.

A few states use an either/or rule, meaning your company triggers nexus when it passes $100,000 in sales or has 200 transactions. Others use an and rule, meaning your company triggers nexus when it has $100,000 in sales and 200 transactions.

And for good measure, a few states use one or the other, looking at transactions but not sales or sales volume but not transactions.

Rules for Remote Seller Sales Tax by State: Gross vs. Retail Sales

To complicate things, states don’t always agree on the type of sales to include in the threshold. Some states use your company’s gross sales when determining the threshold, meaning all your sales in the state, including those that would be exempt from sales tax (such as sales to resellers or tax-exempt organizations).

Some states use retail sales when determining the threshold amount, which includes any sales in the state that aren’t for resale or to wholesalers but may be for tax-exempt products (such as clothing in certain states).

Finally, a few states look at your company’s taxable sales when determining whether you meet the threshold. Taxable sales are retail sales are products where tax is due. It excludes sales of tax-exempt products.

How to Keep up With Remote Seller Sales Tax by State

Keeping track of transactions vs. sales and gross vs. retail sales gets complicated. To help you out, we created state guides and a handy threshold map that illustrates the transaction threshold requirements in each state.

To simplify things further, our sales tax software can do the heavy lifting for you. It calculates your sales tax obligations and collects the tax for each sale. We can also help you streamline your sales tax filing and payments.

Don’t get lost in all the details of remote seller tax rules. Sign up for a TaxCloud account and let us do the hard work for you.