Do I Charge Sales Tax When Selling Out-of-State?

Sales tax represents a consumption tax levied by state and local governments on the retail sale of taxable goods and services. Businesses collect this tax from customers at the point of sale and then remit it to the appropriate government authorities. These funds contribute to public services such as education, transportation infrastructure, and emergency response systems. The application of sales tax becomes more intricate when transactions extend across state lines, requiring businesses to understand specific conditions for collection.

Understanding Sales Tax Nexus

The obligation to charge sales tax in a particular state hinges on establishing “sales tax nexus” in that state. Nexus signifies a sufficient connection between a business and a state, granting the state authority to impose tax collection requirements. Without this connection, a state generally cannot mandate a business to collect its sales taxes.

Sales tax nexus primarily falls into two categories: physical nexus and economic nexus. Physical nexus arises when a business has a tangible presence within a state. This includes maintaining an office, a retail store, or a warehouse. Other activities that create physical nexus are having employees or sales representatives working in the state, storing inventory, or attending trade shows where sales are made.

Economic nexus applies to remote sellers, such as online businesses, and does not require a physical presence. This type of nexus is triggered when a business exceeds certain sales or transaction thresholds within a state. Many states set these thresholds at around $100,000 in gross sales or 200 transactions within a calendar year. The South Dakota v. Wayfair Supreme Court decision in 2018 affirmed that states could require out-of-state businesses to collect sales tax based solely on economic activity. Each state maintains its own distinct rules and thresholds for establishing economic nexus.

Sales Tax Rates and Exemptions

Once a business determines it has sales tax nexus in a state, it must understand the applicable sales tax rates and any potential exemptions. Sales tax rates vary by state and can also differ within a state due to local taxes imposed by counties and cities. The rate charged depends on the specific location of the customer.

Sales tax sourcing rules are categorized as either “origin-based” or “destination-based.” In origin-based states, the sales tax rate is determined by the seller’s location. In destination-based states, the sales tax rate is based on the buyer’s location. For remote interstate sales, most states require sellers to apply destination-based sourcing, collecting tax at the rate applicable to the customer’s delivery address.

Certain sales tax exemptions may apply. A common exemption is the resale exemption, where businesses purchasing goods for reselling them are exempt from sales tax. To qualify, the purchasing business usually provides a valid resale certificate to the seller. Some products are tax-exempt, such as groceries, prescription medications, or certain medical devices. Exemptions can also apply based on the type of purchaser, such as government agencies or qualifying nonprofit organizations.

Registration and Remittance

When a business establishes sales tax nexus in a state, it must register with that state’s tax authority to obtain a sales tax permit or license. This registration must occur before the business begins collecting sales tax from customers in that state. The registration process is often completed online.

Following registration, the business must collect sales tax from customers at the point of sale. The collected sales tax is then remitted to the state’s tax authority. The frequency of filing and remittance is determined by the state and depends on the volume of sales or the amount of tax collected. Most states provide online portals for electronic filing and payment. Maintaining accurate records of all transactions, collected taxes, and filed returns is important for compliance.

Special Considerations for Remote Sellers

Remote sellers face complexities in managing sales tax obligations due to modern e-commerce practices. A key development is the implementation of marketplace facilitator laws across states. These laws mandate that large online marketplaces, such as Amazon or Etsy, collect and remit sales tax on behalf of third-party sellers who use their platforms. This shifts the sales tax collection and remittance burden from the individual seller to the marketplace for sales made through that platform. Sellers still remain responsible for sales outside of these marketplaces, such as those made on their own websites.

Given the varying sales tax rules across jurisdictions, many businesses, especially remote sellers, utilize sales tax automation software or services. These solutions assist with real-time rate calculation, managing exemptions, and streamlining collection and filing processes. Automation helps ensure accuracy, reduces the risk of errors and penalties, and can simplify compliance as a business expands. Sales tax obligations require ongoing attention, as businesses must monitor their sales volume in various states and stay informed about changes in state tax laws to maintain compliance.