Please be advised that we are not tax experts, especially not experts on the complex and complicated matters of Sales Tax with thousands of jurisdictions in the United States. Please understand that the following blog is by no means advice in any area of taxes. Hence the following fine print: NetChain Squared LLC and its affiliates, and the author of this blog post, do not provide tax, legal or accounting advice. This blog post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
As you will see from the details below, Sales Tax is not all that easy – we encourage you to connect with a seasoned tax advisor/accountant.
And finally: Sales Tax is an ever changing area. With over 7,500 different Sales Tax jurisdictions, be prepared for frequent changes.
Top line: you have to collect Sales Tax (or Use Tax, depending on the situation – which, by the way, is just “the other side of the coin” for Sales Tax) whenever you have a “Nexus” in a particular state.
Generally speaking, a physical presence usually creates a Nexus.
A physical presence is mainly created by having an office, employee, affiliate, warehouse, or in some states, a drop shipping location through a 3rd party provider, and storing inventory in this state. But it can mean as well doing business in this state temporarily, like attending a trade show, craft fair or something similar in this state. There are even states where a 2-day trade show visit can trigger a Nexus. And, as soon as a Nexus is established, you have to charge Sales Tax/Use Tax to your customers in that state.
A Nexus is always created in your “Home State”, where you are doing business from. But as the above list shows, and that list is not fully exhaustive, you may need to charge Sales Tax as well from your customers based on their location.
So the first step is done: to establish if you do have a Nexus in a particular state or not. And you may like to report on your employee’s work related travel, as this may create a Nexus as well.
Be aware: you may be considered a “remote seller”, a definition that the below listed states have implemented based on where you do your business from.
If you are local (meaning: residing in this state) or are a remote seller, different tax rates may apply. If you are a remote seller (out-of-state company), you may be required to collect taxes on internet sales and remit them to the states. The number of the states that are imposing Sales Tax/Use Tax on remote sellers is rapidly growing.
The current list as per July 2017:
- New Jersey
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Dakota
- West Virginia
Please be aware that this is fluctuating frequently, and you would need to check for updates regularly.
Most of these states have established a “click-through nexus”. That means that these states define an out-of-state business as having Nexus in the state if the business receives sales referred by another business that is located in the state or has a Nexus there. In more simplified terms, if the sale was initiated by an in-state business through a link, you are considered to have a Nexus in that state. Example: if you received the business based on a Google Ad, and Google has a Nexus in the state your customer resides, so do you. Be aware that the above listed states are a combination of Origin and Destination based Sales Tax states.
What Sales Tax do I have to charge?
This depends on if the State is a “Origin based Sales Tax State” or a “Destination based Sales Tax State”. We’ve included more details below on this topic. You can also rely on one of the many Sales Tax calculation engines, like this one by The Sales Tax Clearinghouse, or this one by TaxJar.
States with no Sales Tax:
- Alaska – has some local Sales Tax
- Montana – has some local Sales Tax
- New Hampshire
Origin-Based Sales Tax States
In Origin-based Sales Tax States, Sales Tax is applicable based on where you, the seller or service provider, resides.
Here is the list of Origin-Based Sales Tax States:
- California – which is actually a hybrid state, county and city taxes are based on the origin, but district taxes are based on the destination of the buyer
- New Mexico
Generally speaking, if you are based in an origin-based state, you have to charge the amount of state and local sales tax effective at your business’ location to everyone who you sell taxable items to in this state. Meaning, the next assessment you have to make is around if you’re located in an origin-based Sales Tax State, and if so, is your customer located in the same state. If the answer to the second question is “yes”, assess the state and local (County, City, District) taxes of your location, and that is what you have to charge.
If your customer is not located in the same state, you need to check next if you have a Nexus in that state – see above.
Destination-Based Sales Tax States
If you have a Nexus in a destination-based Sales Tax State, you have to charge the Sales Tax based on the location of your customer. That usually is a combination of state, county, city, and district tax rates.
Here is the list of destination-based Sales Tax States:
- District of Columbia
- New Jersey
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
As said for the origin-based Sales Tax States, the Sales Tax is usually a combination of state and local (County, City, District) taxes.
After you’ve established if you have a Nexus in a destination-based Sales Tax State, you need to asses the combination of state and local taxes, based on your customer’s location. To be more precise, in most states this is based on the “Ship To” location where your seller receives the goods or the service. Given that, you need to be prepared to charge the Sales Tax based on the location of receipt.
Is What You are Selling Liable to Sales Tax?
Now that you know if you have a Nexus, and if the Sales tax is based on where you reside or your customer resides and your status in the state. The next topic to assess when you are invoicing your customer is if your product/service is taxable.
Generally all tangible goods are taxable. In addition, more states are adding “Digital Goods” (goods that are stored, delivered and used in its electronic format) to the this area as well.
There are exemptions for tangible goods being taxable. Most states do not charge sales tax on food sales with a few exceptions. Arkansas, Tennessee, Virginia, and West Virginia do charge sales tax on food. Also in some states, fruit producing plants (i.e. like a citrus tree) are not taxable. In Texas, “Baked Goods” like bread, are not taxable with the exception of pizza.
Sales Tax exemptions exist in many states for these tangible items as well:
- Prescription drugs
- Agricultural products, like seeds and animal food
- Products for resale, raw materials or inventory that will be resold
This means that although there are a good amount of exemptions for tangible goods, you need to check thoroughly if the goods you are selling are taxable or not based on the other assessments you made.
As the United States is producing less, and the GDP is increasingly based on services, the states have been adapting to this shift as well. Some states define services as generally taxable including Hawaii, New Mexico, and South Dakota. Other states, like Texas, consider some services taxable and others not. Please check on a state level if your service is deemed taxable there. Lastly, be aware that this is constantly changing.
Mix of Goods and Services
It gets even more interesting (or complex) when you are offering a combination of goods and services. States have developed the “true objects test” to evaluate if the transaction was initiated to finally receive a good or a service. This is because generally the main reason drives the taxability. If the main reason was to achieve something that is taxable in this state (like something tangible), then generally tax is due on the entire amount charged for the service, including items such as labor, materials and mileage charges, even if separately stated. This does not apply for states that tax this service anyway (see above).
Who Does Not Have to Pay Sales Tax?
Some of your customers may not to have pay Sales Tax, and some are exempt.
Generally all sales to a federal institution are not liable to Sales Tax. In addition, some state institutions are deemed not liable to Sales Tax as well. Please check with your Federal and State customer about their status regarding Sales Tax.
There is a large list of institutions that are exempt from Sales Tax based on
Who they are:
- Charitable and religious organizations
- Pension schemes
- Educational institutions
What they do:
And in some states even on where they reside, like in an urban development zone.
In all theses cases, your customer has to share the details of the exemption with you. We suggest you do not make assumptions here, but ask for the certificate for the exemption. Until the certificate was received, you would generally need to charge Sales Tax.
Shipping and Handling
The following states do not tax shipping and handling:
- Maryland – if shipping and handling fees are combined, shipping is taxable
- Virginia – if shipping and handling fees are combined, shipping is taxable
Registering for Sales Tax
You need to register for Sales Tax on a State, County, City and District level. Some states do this in combination once you register on a state level and some require you to register with each tax authority. Please check details on the location.
Finally, do not forget to report and pay the Sales Tax you collected. In most states, the reporting (submitting of tax returns) and payment is based on the amount of your sales. Most states will provide you with information on how and when to submit your tax returns when registering for Sales Tax. Lastly, be aware that late reporting and/or payment of Sales Tax can lead to substantial fines.
In regards to NetChain2, we charge Sales Tax for the following reasons; Arizona (our home state) is an origin-based Sales Tax State and Arizona also assesses SaaS solutions taxable.