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1 October 2018 / Individuals

What are sales taxes?

1 October 2018 > Individuals

A sales tax is a direct tax on the purchase of goods and services that many states and local governments enforce. The amount of tax you pay is typically figured as a percentage of the sale price. As of 2017, 45 states and a range of counties and cities charge a sales tax.

Sales Tax Payments

Only five states, Delaware, Montana, Alaska, Oregon, and New Hampshire, do not have a sales tax. Due to the nature of sales taxes being based on fixed percentages, the only way to avoid paying them is to reduce your purchases or by making all of your consumption in one of the five states that do not impose sales taxes.

Sales Tax Collection

Being that sales taxes are set at the point of a sales transaction;  service providers are responsible for collecting and submitting taxes to the state. Thus, businesses are required to maintain records of all sales taxes collected and that periodic payments be made to the government. A business is liable for sales tax in a jurisdiction if they have nexus there. Nexus can be created as a result of a brick-and-mortar location, an employee, an affiliate or any other form of presence set forth by the laws of that jurisdiction.  

Online Sales  

Online retailers are responsible for sales tax in the state to which they are selling their products. It is their responsibility to charge buyers the correct amount of sales tax and remit the taxes collected back to the state.

The basic rule for online sellers when collecting sales tax is:

  1. Your business has sales tax nexus in the same state as your customer. Ways to Have Sales Tax Nexus in Different States:

    1. A location: an office, warehouse, store, or other physical presence of business.

    2. Personnel: an employee, contractor, salesperson, installer or other person doing work for your business.

    3. Inventory: Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel.

    4. Affiliates: Someone who advertises your products in exchange for a cut of the profits creates nexus in many states.

    5. A drop shipping relationship: If you have a 3rd party ship to your buyers, this may create nexus.

Selling products at a trade show or other event: Some states consider you to have nexus even if you only sell there temporarily.

  1. The product is taxable in that state. Each state decides which items are and are not taxable. If you think you may be selling an item that isn’t taxable, check with your state.

Phillip Ingelmo

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