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

Sales tax is complex for businesses selling and shipping products across state lines. Rules for collection are not uniform, determined by each state. Businesses operating nationally must navigate these varying regulations to ensure compliance, avoid penalties, and manage financial obligations.

Understanding Sales Tax Nexus

Sales tax nexus is the connection a business must have with a state before it can be required to collect and remit sales tax. Without nexus, a state generally lacks the authority to impose collection requirements. This concept is foundational for determining sales tax obligations for out-of-state sales.

There are two primary ways to establish sales tax nexus: physical presence or economic activity. Physical presence nexus occurs when a business has a tangible link to a state, such as a physical office, retail store, warehouse, or employees working there (even remotely). Maintaining inventory in a third-party fulfillment center also creates physical presence.

Economic nexus, a more recent development, is triggered when a business meets certain sales volume or transaction thresholds in a state, even without physical presence. This concept gained widespread adoption following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which eliminated the physical presence requirement for sales tax collection and affirmed states’ ability to require remote sellers to collect sales tax based on economic activity.

Economic nexus thresholds vary significantly by state; a common example is $100,000 in gross revenue or 200 separate transactions into a state within a calendar year. Businesses must monitor sales activity to identify when these thresholds are met. Once crossed, nexus is established, creating an obligation to collect sales tax.

Determining Sales Tax Applicability for Out-of-State Sales

Once a business has sales tax nexus in a state, it must understand how sales tax applies to out-of-state shipments to customers in that state. If a seller has nexus in the destination state (where the item is shipped), they must collect sales tax from the buyer. This requires charging the appropriate sales tax rate based on the buyer’s location.

Sales tax “sourcing rules” dictate which rate applies to a transaction. The two main types are destination-based and origin-based sourcing. Destination-based sourcing, used by most states, determines the sales tax rate by the buyer’s location (the shipment’s destination). For example, if a business ships a product to a customer in a destination-based state, the rate applied is at the customer’s delivery address, potentially including state, county, and city taxes.

In contrast, origin-based sourcing, used by a smaller number of states, bases the sales tax rate on the seller’s location (the shipment’s origin). While origin-based states typically apply the seller’s local rate for in-state sales, for out-of-state sales, remote sellers with nexus must collect sales tax at the buyer’s destination rate.

Some states may have hybrid sourcing rules, using origin-based rules for state, county, and city taxes, but destination-based rules for certain district taxes. Businesses must accurately identify the customer’s location and apply the correct tax rate based on the sourcing rules of the state where nexus is established.

Common Sales Tax Exemptions

Not all sales are subject to sales tax, even with nexus in a state. Various exemptions can relieve a seller from collecting sales tax on certain transactions. These exemptions are highly state-specific; what is exempt in one state may be taxable in another.

One common exemption is the resale exemption. When a buyer purchases goods for resale, the purchase is typically exempt from sales tax. The rationale is that sales tax generally applies to the final retail sale to the end consumer, so taxing an intermediate sale for resale would result in double taxation. To qualify, the buyer must provide the seller with a valid resale certificate, which the seller must retain.

Certain products may also be exempt from sales tax. Many states exempt necessities like food items, prescription medications, and medical devices. Manufacturing equipment or agricultural products might also be exempt to support specific industries. These product-based exemptions vary widely, with some states offering complete exemptions and others applying reduced rates.

Exemptions can also be based on the buyer type. Government entities (federal, state, and local agencies) are often exempt from sales tax on purchases. Non-profit organizations, charities, and educational institutions may also qualify in many states, provided they have proper documentation. Sellers must obtain and maintain valid exemption certificates from these buyers to substantiate the tax-exempt sale and avoid potential audit liability.

Managing Sales Tax Compliance

Once a business determines it needs to collect sales tax on out-of-state shipments, several steps are necessary to ensure compliance. The initial step is to register for a sales tax permit in each state where nexus has been established. This registration is typically done through the state’s department of revenue website. Businesses generally need to provide their Employer Identification Number (EIN), business type, and other relevant company information during this process. It is unlawful to collect sales tax without being properly registered.

After registration, the business must accurately collect the correct sales tax rate on taxable sales. This often involves calculating state, county, city, and special district taxes, especially in destination-based states. Due to thousands of unique taxing jurisdictions, many businesses use sales tax software or services to determine and apply precise rates for each customer’s location. These tools ensure the correct amount is charged at the point of sale.

The collected sales tax must then be filed and remitted to the appropriate state tax authority. Filing involves submitting a sales tax return detailing sales activity and the amount of tax collected for a specific period. Remittance is sending the collected tax money to the state. Filing frequencies vary, with most states assigning monthly, quarterly, or annual requirements based on a business’s sales volume or tax liability. Higher sales volumes typically necessitate more frequent filings.

States generally prefer electronic filing and payment, often through their online portals. While specific due dates vary by state, many returns and payments are due on the 20th of the month following the reporting period. Accurate record-keeping of all transactions, including taxable and non-taxable sales, is important for preparing returns and maintaining compliance. Even if no sales tax was collected during a period, many states still require a “zero return” to be filed.