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Where and When Should I Collect Sales Tax?

author photo of Michael J. Fleming

One of the most frequently asked questions I receive is when and where should I collect sales tax. There are 45 states plus Washington D.C. that have a sales tax. There are five states that do not have a state level “sales” tax. They are New Hampshire, Oregon, Montana, Alaska and Delaware. If you take the first letter of each state you have the acronym NOMAD.

Sales tax is generally due in the state where the customer receives the product. For online sales this is where the product is shipped. You do not currently have to collect sales tax everywhere, but sales tax should be collected in all states where the following three criteria are met:

1) You have nexus.

2) What you sell is taxable.

3) Your exposure is material.

Nexus is a fancy term that simply means link or connection. It all starts with Nexus. If you have a link (nexus) with a state, the state can require you to collect taxes. If you do not have this link, than the state cannot currently require you to collect taxes. While nexus requirements can vary by state (so it's important to check) here are three of the most common nexus creating activities:

1) Anywhere you live or operate your business.

2) Anywhere you store inventory or own any type of property.

3) Anywhere you have employees or third-parties who help you to establish or maintain a market.

If you determine you have nexus in a state then you need to determine if what you sell is taxable in that state. Taxability can vary from state to state.

If you have nexus and what you sell is taxable, then we next have to look at materiality. Even though a state may say you should collect sales tax on all sales, sometimes that may not make good business sense. For example if you sold $1000 worth of items in a state over the course of a year and the average sales tax rate was 8% you would owe $80 worth of sales tax. In this scenario, the cost of compliance would probably exceed the amount sales tax that would be collected and remitted. So in this case many businesses would wait until their exposure reaches a level that justifies the cost of compliance. There are a lot of factors that go into this calculation and each business will have to determine what is material for them, in general I cannot make the math work when the annual sales in any one state are less than $3,000.

Sales tax is very important and with penalties and interest often approaching 50% or more, you want to make sure you don’t wait too long to take care of becoming compliant, but neither do you want to make the mistake of starting too early.

Other recent “Sales Tax Basics” posts by Michael J. Fleming:

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Comments

9 Responses to Where and When Should I Collect Sales Tax?

  • Posted by Adam on April 6, 2018 1:03pm:

    How in the world do you know so much about all of this? That is amazing. Meanwhile I am starting to do some drop shipping and the states you mentioned are still going to charge me sales tax which makes transactions COST ME TO SELL THEM and so I need to learn about this everything I can.

    I've been printing your articles and reading them - if you have any addressing how to communicate with these difficult states and possibly dissuading them from charging me the sales tax, I would really appreciate that.
    I understand that it gets to be a mess when they want to charge my supplier, and then if they don't charge me THEY are doomed. In all honesty the sales tax mess across the country reminds me of several hoodlums who drank too much and went out robbing everyone. Who is taking how much of what when and from which one of who and trying to justify why and making the amount of sense due to taking so much of the alcohol.
    But I sure hate to simply disable those states - you know?
    PS:
    I cannot believe that you are not charging people for this. Thank you for your articles!!

    • Posted by Author photo of Michael J. Flemingmikefleming on April 8, 2018 5:25pm:

      Hi Adam,

      We answer what we can in this forum, but many sellers require detailed research or consultations.

      Based on your email I think you would benefit from a consultation.

      States do not charge sales tax, they require sellers to collect the tax if they have nexus, and/or the purchasers to pay it. This tax is collected/paid on every single transaction. The only way a seller with nexus can avoid collecting the tax from their customer, in this case you, is if you can provide them with a valid certificate in the ship to state.

      The only way you can avoid complying with your vendors is by having all your vendors ship to your home state where you take delivery and then you shipping the packages to your customers yourself.

      Trying to speak to states will not generate any deviations from the established their policies.

  • Posted by Marsha on April 5, 2018 9:51am:

    I work for a municipal government in Maryland. The town will be selling souvenirs, t-shirts, etc. this year.
    As a municipal government, are we supposed to charge sales tax for these items?
    We have both an EIN and a MD Tax Exempt number.
    Thank you.

    • Posted by Author photo of Michael J. Flemingmikefleming on April 8, 2018 4:52pm:

      Hi Marsha,

      The answer is maybe. Taxes are intended to be paid by purchasers and collected by sellers. Some states have exemptions for sales by non-profits , but in general the exemptions are for purchases not sales. This would require research into what Maryland requires.

      If you wish us to research for you let us know.

  • Posted by Clayton on April 5, 2018 9:37am:

    Michael,
    I have a question about Alabama, Arizona, and Arkansas. As I understand it, these states will except a home state exemption certificate. Speaking specifically about AL, we do not have Nexus there, but one of our drop-ship suppliers does. I would like to present my drop-shipper with an exemption cert so they will stop charging me tax on orders they are shipping to AL. I spoke with the AL tax office and they will not accept my application for exemption because, according to them, I do not need it. Also because I am not registered with AL to pay sales tax. I need some advice on how to deal with these three states, as it relates to providing the proper paperwork to my drop-shipping supplier. Thanks!

    • Posted by Author photo of Michael J. Flemingmikefleming on April 5, 2018 9:47am:

      Hi Clayton,

      When we talk about what a state will accept, we are referencing what the state will accept if they audit your vendor. So if a state will accept your home state exemption certificate that is what you would provide your vendor.

      There is no need or reason to contact the state.

      Sometimes your vendor may not understand what they can accept. In these cases you can ask them what they will accept or if the money is material, you can get them on the phone with us and we can walk them through what they can accept that will allow them not to charge you sales tax while still protecting them.

      Mike

      • Posted by Clayton on April 5, 2018 11:37am:

        Mike, thank you for the prompt reply. I will address with my vendors accordingly and circle back should we need additional help.

  • Posted by JOGEN on April 4, 2018 10:50am:

    Dear Michael,
    We are in the process of setting up an internet business based out of Coppell, Texas. We will only have small warehouse presence in Texas. However, our sales orders may come from any of the 45 states. We will be shipping these orders through FedEx. Initially there will be no 'nexus' except Texas. Should we collect only Texas Sales Tax? If for example if we deliver a shipment to California, are we required to collect California Sales Tax or Texas Sales Tax? Also, Do we need to register with California Sales Tax?

    • Posted by Author photo of Michael J. Flemingmikefleming on April 4, 2018 6:49pm:

      Hi Jogen,

      As of now you would only be required to collect sales tax where you have a link or connection. Sales into a state do not create this link or connection. This may all change in June if the US Supreme Court decides to overturn Quill. So based on the limited information provided, it appears you only have responsibility to collect sales tax in Texas.

      However, there is a new trend amongst the states called notice and reporting. In these states if your sales cross certain thresholds you are required to provide a series of notices to your customers. Voluntary registration relieves you of this responsibility.

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