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:
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!