Sales Tax Basics
page last edited on 20 March 2019
Sales tax in the US is charged to end-buyers by retailers only. The retailers file returns and remit the tax to the state. There is no national general sales tax in the US, each state governes sales tax at the state level and collects it from the merchants who have nexus (phisical or economical presence) there. As of Janyary 2019, 45 states plus the District of Columbia impose a general sales tax, 5 states (Alaska, Delaware, Montana, New Hamphire, Oregon) has no general sales tax though some local areas within these states may be able to charge a sales tax. Sales tax rates vary by state, and by locality within a state (a county, city, or any special taxing district).
There are different types of sales taxes imposed by the states. Some states collect taxes on an origin basis while the others on a destination basis.
If a merchant is based in an origin-based state, sales tax is to be charged at the rate of the state where the merchant is located. A merchant’s location (an office, warehouse, place where the inventory is stored, etc.) is taken as a basis for the sales tax calculation.
If a merchant has sales tax nexus in a destination-based state, sales tax is to be charged at the rate of the state where the product is delivered (customer ship-to address). Destination-based taxation is more complex as it could include a combination of state, county, city, and district tax rates, e.g. in California the state, county, and city taxes are origin-based, but any district taxes are destination-based.
For either basis, the location is determined by the 5-digit zip code of either a store’s business address or the shipping address of a customer. The rates in effect for that zip code are then used in the tax calculations.
In addition, different states may have different rules for out-of-state merchants (remote sellers) who are selling into their states. A state considers a merchant a remote seller if they have sales tax nexus in that state but are not based there. Hence it’s always necessary to consult an accountant or a local tax authority before configuring taxes in a store.
A state where a merchant collects sales tax also determines whether they should charge sales tax on shipping charges. Some states consider shipping charges to be a necessary part of a taxable eCommerce transaction, and require online sellers to charge sales tax on any delivery charges. Other states do not require online sellers to charge sales tax on shipping charges if the charge is clearly separated from the price of the taxable products.
It is strongly recommended to consult an accountant or a local tax authority on the sales tax rates to ensure your store is configured properly and collects the correct sales tax rate.
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