U.S. Sales Tax in eCommerce: What You Need to Understand in General
Like most countries, sales Tax in the U.S. may be complicated. Because the country has 50 states, computing sales tax seems impossible. It is also subject to, more often than not, changes, especially globally, as we are facing the pandemic.
A sales tax is a consumption tax imposed by the government for the sale of goods and services. It is also called a ‘pass-through’ tax, where the seller collects that Tax from the customers and pays the government.
Normally, taxation is easy. For example, you set up a store in your State, then you make sales and charge an additional percentage to your selling price, the customers pay for your goods plus the taxes, then at the end of the month, you have to remit it to the State.
However, with eCommerce as a booming business, many sellers now sell to customers in different states. That means the eCommerce seller needs to remember how much the tax percentage is in most states to get the right taxes.
Sales Tax Rates of Different States
(Updated as of April 9, 2021)
| State | Tax Rate |
| Tennessee | 9.55% |
| Arkansas | 9.53% |
| Louisiana | 9.52% |
| Washington | 9.23% |
| Alabama | 9.22% |
| Oklahoma | 8.95% |
| Illinois | 8.80% |
| California | 8.68% |
| Kansas | 8.68% |
| New York | 8.52% |
| Arizona | 8.40% |
| Nevada | 8.23% |
| Missouri | 8.20% |
| Texas | 8.19% |
| New Mexico | 7.83% |
| Utah | 7.80% |
| Colorado | 7.65% |
| Minnesota | 7.46% |
| South Carolina | 7.46% |
| Georgia | 7.31% |
| Ohio | 7.17% |
| Mississippi | 7.07% |
| Florida | 7.05% |
| Indiana | 7.00% |
| Rhode Island | 7.00% |
| N. Carolina | 6.98% |
| Iowa | 6.94% |
| N. Dakota | 6.94% |
| Nebraska | 6.93% |
| New Jersey | 6.60% |
| West Virginia | 6.50% |
| South Dakota | 6.40% |
| Pa. | 6.34% |
| Mass. | 6.25% |
| Vermont | 6.22% |
| Idaho | 6.03% |
| D.C. | 6.00% |
| Kentucky | 6.00% |
| Maryland | 6.00% |
| Michigan | 6.00% |
| Virginia | 5.65% |
| Maine | 5.50% |
| Wisconsin | 5.43% |
| Wyoming | 5.34% |
| Hawaii | 4.44% |
| Connecticut | 3.35% |
| Alaska | 1.76% |
| Delaware | 0.00% |
| Montana | 0.00% |
| New Hampshire | 0.00% |
| Oregon | 0.00% |
As mentioned, tax rates differ in different states. Delaware, Montana, New Hampshire, and Oregon are still Sales Tax-Free. While Tennessee charges the highest Sales Tax at 9.55%, Alaska, previously Sales Tax-Free, just charges 1.76% of Sales Tax.
Sales Tax Exemptions
There are ways to skip the sales tax. However, there are items in some states that are not taxed. Thirteen states do not charge sales tax on groceries. At the same time, some have special tax rates to none on prescription drugs.
Here are some items that are generally not charged with Sales Tax:
- Raw Materials
- Item purchased for a non-profit
- Items for resale
Why do States Want to Collect Sales Tax?
In the pre-eCommerce era, remote sellers were telemarketers who accepted orders via phone and sent your orders via mail. Isentes does not greatly affect the percentage of consumers who still prefers buying through shopping centers with more viable and solid tax laws. In short, the State does not worry. It collects most of what it should from the shops in their State and ignores the small sales earned via call.
Moving forward through the internet age and as businesses evolved with incorporating their advertising through social media, a huge gap exists between the sales made in actual stores and those sold online. Billions of items sold were not being charged with Sales Tax.
Imagine the huge revenue a state can collect from this amount of sales. The State has to earn, and someone has to pay for these. They started to look through the ‘loophole’ and find a way to earn what is due to them, which is of value.
By the end of the year, it was estimated that sales on the eCommerce platform might hit $ 659.9B (via Statista). That’s a lot of taxes!
We know that the States gets their fund from taxes; it helped them grow economically and make themselves globally productive.
Sale Tax in eCommerce
On June 21, 2018, U.S. Supreme Court imposed that states may now charge Sales Taxes on online sellers. While it may be considered confusing, it means that businesses should pay taxes on states where they have an economic presence. It doesn’t have to be establishing and registering their businesses in that State. Still, if they are selling to the people of that state, the business is liable to collect and remit sales taxes on that State.
The 1992 Ruling called Quill, which disallowed states to run after businesses without a physical presence in the State, was overruled by the 2018 ruling via South Dakota v. Wayfair court decision.
The 2018 U.S. Supreme Court law said that as long as you do business in a state, you must abide by the sales law practice of that State. During that time, figuring out how to be taxed was messy. But now, we already have a Marketplace Facilitator Law.
What is a Marketplace Facilitator?
Marketplace Facilitator is a business that lists products from different business owners known as the ‘third-party sellers’ and sells them to its platform. It collects payments and receipts and handles packing and shipping to customers.
Marketplace Facilitator Law is when the seller’s facilitator handles the collecting and remitting taxes to the correct State.
If you are a business owner with a physical presence in a certain state, you must know that you still need to collect and remit taxes on the State even though you also have an agreement with a Marketplace Facilitator.
Later, we will discuss more of Marketplace Facilitator Laws in different states.
Tax Nexus
Nexus in Latin means to join or to bind, a link or a connection.
Tax nexus is the connection between a seller and a state that requires the seller to register and then collect and remit sales tax in the State. A business might have a nexus with the State if one of the followingindicationsniss met:
- Economic Activity
- Physical Presence
- Remote Employees
- Website in-state
- Business Affiliates
- Other activities may not be limited to warehouses, dropshipping, receiving sales referrals in-state, or even temporarily doing business in-state.
If you have a nexus in a certain state, you must collect sales tax on your customers based on the tax rate where your business has a nexus.
Sales Tax Rate imposition differs from each locality: origin- and destination-based tax states.
Origin-based sales tax states you charge the amount of state and local sales tax effective at your business location to everyone you ship taxable items in that State. So your location would be your office, warehouse, or drop shipping hub.
Destination-based sales tax states you must calculate the sales tax rate effective where your buyer is. This means you would charge multiple sales tax rates within a state.
How to Ensure that Your Business Is Nexus Compliant?
There are many sources online that would help a business owner find a way to be fully compliant with Tax.
One way is to monitor where your items go and when. As I have mentioned, there are 50 states that your orders from customers could be shipped to. You also have different prices from your listing.
You must have a dedicated person to monitor all these for you, or you may consider automating your Sales Tax Computation.
These sales tax automation systems directly integrate with your marketplace facilitator that will compute taxes when needed. It may seem costly, but it will save you much time.
Taxes and Covid-19
We already know that taxes are ever-changing, and we must expect major tax rulings changes. COVID, the global pandemic,c surely hit the laws for sure. For example, in July, New Jersey et a new tax law that could impose taxes on those who process 10,000 transactions through electronic infrastructure in their State. (Source: Bloomberg tax )
You can still do well without worrying about remembering all these tax laws; you just need to hire a professional to help you with taxes and save more!
