A lot of myths and misconceptions swirl around sales tax, and today we’re busting the five most common.
Myth 1: I only sell online, so I’m not required to collect sales tax
Truth: Anyone who sells taxable products at retail and has sales tax nexus in one of the 45 U.S. states (plus D.C.) with a sales tax is required to collect sales tax from buyers in that state. This doesn’t matter if you only sell from home at your computer, or if you drop ship items to your customers from other vendors and never take possession of the items yourself. Anyone making taxable retail sales is required by state law to collect sales tax. You can read about how to collect sales tax in every state here.
Myth 2: I paid sales tax when buying a product, so I don’t need to pay sales tax when reselling it
Truth: Just like above, every time you sell a taxable product at retail to a buyer in a state where you have sales tax nexus, you are required to collect sales tax. It helps to think of sales tax as charged on the transaction, rather than on the item itself. Just remember that “sales tax” means a “tax on the sale.”
However, there are a couple of ways to avoid paying sales tax on items you intend to resale. First, you can present a resale certificate to your vendor when buying items that you intend to resale. If for some reason you were unable to buy these products without paying sales tax, some state sales tax filings allow you to recover the sales tax you paid.
You can read more about buying products for resale with a resale certificate here.
Myth 3: I’ll only ever have to collect sales tax from buyers in my home state
Truth: Due to a precedent set by the Quill v. North Dakota Supreme Court case back in 1992, U.S. retailers are only required to collect sales tax in state where they have “more than the slightest presence.” In other words, if you have no presence in a state, then you are not required to collect sales tax from buyers in that state. Inversely, if you have a presence in a state, you are required to collect sales tax from buyers in that state. Each state has written their own laws, within the bounds of Quill and the U.S. Constitution, that lays out what creates nexus for retailers in every state. You can read each state’s sales tax nexus law here.
So, while it’s true that some online sellers will only have sales tax nexus in their home states, others may have nexus in multiple states.
Myth 4: I have nexus in State X due to selling on Amazon. So, I only need to collect sales tax from Amazon buyers in that state
Truth: This can be one of the more complicated concepts for online sellers to wrap their minds around. To put it simply, if you have sales tax nexus in a state, your business is required to charge ALL buyers in that state sales tax.
Let’s look an example:
You sell via Amazon FBA and have your own store on Shopify. Because you sell on Amazon FBA and your inventory is stored in 10 states, you are required to collect sales tax from buyers in those 10 states. But, since your business has nexus in those 10 states, you are also required to collect sales tax from all buyers in those 10 states, including the buyers who purchase from you through your Shopify store.
It helps to remember that sales tax nexus for one part of your business creates sales tax nexus for all aspects of your business.
(Important note: Amazon recently announced that they would begin collecting sales tax on behalf of 3rd party sellers on sales to the state of Washington. Even though Amazon will now collect the sales tax, the Washington Department of Revenue has advised that 3rd party Amazon sellers are still considered to have “remote seller nexus” in the state. So, in this case, you may find yourself in the odd position of not being required to collect sales from Amazon buyers in Washington, but being required to collect sales tax from other buyers in the state of Washington.)
Myth 5: I didn’t make any sales recently, so I don’t need to file a sales tax return
Truth: If you currently hold a valid sales tax permit, always file a sales tax return by the due date. Do this even if you didn’t make any sales and don’t have any sales tax to report or remit to the state. Why? Because states consider sales tax filing to be a sort of “check in.” They want to know that you are still in business and will continue to file and remit sales tax.
What happens if you don’t file a sales tax return? Some states levy penalties, usually about a $50 fine. It’s no fun to be fined for failing to file sales tax, and it adds insult to injury when you didn’t even owe any sales tax to the state in the first place! Some states will cancel your sales tax permit if you repeatedly fail to file. While this is better than owing a fine, it can still be a hassle to register and apply for a new sales tax permit when your business starts making sales again.
I hope this post has busted the 5 most common sales tax myths. Have questions or something to say? Start the conversation in the comments!
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