Do You Charge Sales Tax on Items Shipped Out of State?

Sales tax for businesses selling goods across state lines presents a complex challenge. While the fundamental concept of sales tax may appear straightforward, interstate transactions introduce complexities due to varying state regulations. Understanding when and how sales tax applies to items shipped out of state is important for compliance. This article will explore the factors that determine sales tax obligations, the methods for calculating rates, common exemptions, and the processes for managing these responsibilities.

Determining Sales Tax Nexus

The obligation to collect sales tax in a particular state hinges on “nexus,” a sufficient connection between a business and that state. Historically, this connection was primarily based on “physical nexus.” This meant a business needed a tangible presence in a state, such as an office, a warehouse, employees, or inventory, to collect sales tax from customers there. Even sending sales representatives to a state or owning property there could create this physical link.

The landscape of sales tax obligations changed with the 2018 Supreme Court decision in South Dakota v. Wayfair. This ruling introduced the concept of “economic nexus,” allowing states to require out-of-state businesses to collect sales tax even without a physical presence. Economic nexus is established when a business meets specific sales volume or transaction count thresholds within a state, typically during the current or preceding calendar year. Common thresholds include $100,000 in gross sales or 200 separate transactions annually, though these amounts can vary among jurisdictions.

Beyond physical and economic presence, other types of nexus can also trigger sales tax collection requirements. “Affiliate nexus” arises if a business has an agreement with an in-state person or entity that refers customers for a commission. “Click-through nexus” is established through a similar arrangement where in-state residents refer customers via website links in exchange for commissions. Some states also recognize “cookie nexus,” which occurs when a business places software or data on devices within a state, facilitating sales.

Understanding these various forms of nexus is the initial step for any business shipping goods across state lines. Failing to identify where nexus exists can lead to penalties, including back taxes, interest, and fines. Each state defines its nexus rules, requiring careful review for businesses operating nationally.

Sales Tax Sourcing and Rates

Once a business determines it has sales tax nexus in a state, the next step is identifying the correct sales tax rate to apply to customer purchases. This process is governed by sales tax sourcing rules, which dictate if the tax rate is based on the seller’s or buyer’s location. The two primary methods are “origin-based sourcing” and “destination-based sourcing.”

Under origin-based sourcing, the sales tax rate is determined by the seller’s business location. If a business is located in a specific city, it charges that city’s sales tax rate, regardless of where the buyer resides within the same state. This method simplifies tax calculation for sellers as they apply one rate based on their physical address.

Conversely, destination-based sourcing means the sales tax rate is determined by the buyer’s location or the point of delivery. This is the more common method, especially for interstate sales, and adds complexity. Businesses must identify the specific local tax jurisdictions (city, county, and special taxing districts) where the customer is located to apply the accurate combined state and local sales tax rate. Rates can vary even within a single state, requiring precise address-level tax calculations.

Calculating the precise sales tax can be challenging due to many overlapping tax jurisdictions. A single state may have a statewide sales tax, but counties, cities, and improvement districts can impose additional local sales taxes. Businesses must accurately identify the full tax rate for each customer’s address to ensure proper collection and remittance.

Sales Tax Exemptions

Even when a business has established sales tax nexus in a state and correctly identified the applicable sourcing rules, sales tax may not be collected in some scenarios. Understanding these exemptions is important for compliance and accurate transaction processing. One common exemption is for sales made for resale.

When a business sells goods to another business that intends to resell those goods, the initial sale is exempt from sales tax. To qualify for this exemption, the seller must obtain a valid resale certificate from the buyer. This certificate verifies the buyer is a legitimate reseller responsible for collecting sales tax from their end-consumer. Properly documenting these sales is important; without a valid certificate, the seller could be held liable for uncollected sales tax during an audit.

Beyond sales for resale, states offer other product-specific or industry-specific exemptions. For instance, many states exempt certain necessities, such as unprepared food items, from sales tax, or apply a reduced rate. Prescription medications and medical devices are also often exempt. Some jurisdictions provide exemptions for specific business inputs, like manufacturing equipment or raw materials, to avoid taxing items multiple times.

The applicability of these exemptions depends on the state’s laws and the nature of the product or service being sold. Digital goods, such as streamed content or software downloads, and certain services may be treated differently; some states exempt them, tax them at a reduced rate, or tax them fully. Businesses must research and understand the exemption rules in each state where they have nexus to ensure they are not over-collecting or under-collecting sales tax.

Managing Sales Tax Obligations

Once a business determines it has sales tax nexus in a state, the next step is to register with that state’s tax authority. This acknowledges the business’s obligation to collect and remit sales tax. Registration involves providing business information, such as the legal business name, physical address, federal Employer Identification Number (EIN), the type of business entity, contact details, and an estimate of anticipated sales volume. Most states facilitate this process through an online portal, making it straightforward to complete.

After registration, a business assumes sales tax compliance responsibilities. This includes collecting sales tax from customers at the point of sale. Collected amounts are held in trust until remitted to the state. Businesses must then file sales tax returns periodically, reporting total sales and tax collected.

The frequency of filing sales tax returns is determined by each state and depends on the business’s sales volume. Higher sales volumes necessitate more frequent filings to ensure steady revenue to the state. The process for filing returns involves accessing the state’s online tax portal, entering sales and tax data, and remitting funds electronically. Accurate record-keeping of all sales, collected taxes, and exemption certificates is important to streamline filing and support compliance during audits.

Sales Through Online Marketplaces

The rise of e-commerce has introduced a consideration for sales tax obligations, particularly for businesses selling through online platforms. Many states have enacted “marketplace facilitator laws” to address sales tax collection complexities. These laws shift the responsibility for collecting and remitting sales tax from third-party sellers to the online marketplace platform.

Under marketplace facilitator laws, if a seller makes sales through a platform like Amazon, eBay, or Etsy, the marketplace facilitator is responsible for calculating, collecting, and remitting the sales tax for those transactions in states with such laws. This reduces the direct sales tax compliance burden for sellers utilizing these platforms.

However, this shift in responsibility applies only to sales made through the marketplace facilitator. If a business also sells products through its own website, brick-and-mortar store, or other channels, it remains responsible for sales tax obligations and collection duties for those direct sales. Sellers must still monitor their sales volume and transaction counts from all channels combined to determine if they establish economic nexus in any state, even if marketplace sales are separately handled. While marketplace facilitator laws simplify compliance for specific transactions, businesses still need a comprehensive understanding of their overall sales tax responsibilities.