Sales tax regulations are continually changing, and the internet has made them more complicated than ever. We’ve put together the 10 most important things you should know about sales tax in order to help you navigate this confusing topic as you establish your Shopify store.
1. The State Governs Sales Tax Laws
Each state has its own laws regarding sales tax – in fact, there is no such thing as a “federal sales tax.” The rules and regulations regarding sales tax change from state to state.
2. Sales Tax is Only Necessary in States Where You Have a “Nexus”
A sales tax nexus is defined as a “significant presence” in a state, meaning you only need to charge sales tax in states where you have a physical location, staff, a warehouse, or are selling physical products (at a trade show or fair). You do not need to charge sales tax where you do not have a significant physical presence.
3. You’ll Need a Sales Tax Permit to Collect Sales Tax
For each state in which you have a nexus, you’ll need to register for a sales tax permit. In many states, it’s illegal to collect a sales tax without a permit, so it’s absolutely necessary that you obtain one before you begin charging sales tax.
4. Sales Tax is Not Applicable to All Items
When you sell physical products, you can typically charge sales tax. However, many states have exceptions which prevent businesses from charging sales tax on certain items. For example, some states exclude clothing or groceries from their sales tax laws. You’ll need to understand the sales tax exceptions in each state you plan to charge a sales tax.
5. Sales Tax Rates Vary from State to State
Depending on where you make a purchase, you can expect to pay varying sales tax. You’ll need to understand the varying sales tax regulations from state to state before you apply it to your store. Fortunately, there are a number of sales tax calculators online which you can use to pinpoint the exact sales tax rates from state to state.
6. Understand the Difference Between “Origin-Based” and “Destination-Based” Sales Tax
In order to know what you’ll charge customers in your home state, you’ll need to know if you live in an origin-based or a destination-based sales tax state. If you live in an origin-based state, you’ll need to charge sales tax based on your location. However, the majority of states are considered destination-based, meaning you’ll charge sales tax based on the location of your customer.
7. Collect Sales Tax on Every Eligible Sale in Your Nexus States
You must charge sales tax on every eligible sale in your nexus states – every platform, every shopping cart, every store must charge sales tax for customers located in where you have a significant presence.
8. The Frequency of Your Sales Tax Filing Will Depend On Your Sales Volume
As your sales volume in a state increases, you’ll need to file a sales tax return more often. This can be monthly, quarterly, or annually.
9. Sales Tax Due Dates Are Not Consistent From State to State
For each state, there is a different day of the month when you are expected to report your sales tax information. Most states will expect to hear from you on the 20th of each month, but this can vary from state to state.
10. File “Zero Returns”
When you are registered for a sales tax permit, you must file a sales tax return by your due date – whether or not you collected any sales tax in that state during the tax period. These are known as “zero returns,” and they serve as a check-in with the government – if you don’t follow them, you could face a fine or the cancellation of your tax permit.
Are there any important sales tax facts we missed? Let us know in the comments below!