Several states mandate businesses to charge and collect sales tax from their customers. Generally speaking, the onus of collecting and remitting sales taxes lies squarely on the shoulders of business owners in states that impose such levies. Online retailers in some states are exempt from collecting sales taxes from customers.
To know if you, as an online merchant, are required to collect sales tax, you must first ascertain whether or not your state has a sales tax. Some states, like Alaska and Oregon, do not collect sales taxes even though many others do. Some cities within a state could have a greater sales tax than the state itself.
In California in 2022, for instance, the local sales tax rate was 7.25%, the same as the statewide rate. As a business owner, you must consider taxes whenever you set prices. Many states that collect sales tax have exemptions for specific categories of goods, most notably groceries.
When Should Tax Be Collected on Purchases Made Online?
The following serves as a general guideline for assessing whether and how to collect sales tax on online purchases:
- Customers in states where your business has a “nexus” must pay sales tax.
- When a vendor does not have a storefront in the state where the buyer resides, the buyer is not required to pay sales tax on the purchase. U.S. Supreme Court precedent suggests a ruling in favor of requiring sales tax collection in June 2018, which will end the exemption.
Keeping an office in a state is what is meant by having a “physical presence.” This include:
- An office
- A storefront
- A warehouse
Required Nexus Between Online Sellers and the States
In the law, “nexus” refers to a connection between two parties. “Know your client” means the seller is aware of the tax legislation of the country where the customer is located before the seller is compelled to collect tax on the sale.
Numerous state and federal courts have reached different conclusions on the scope of this link. Despite this, almost everyone acknowledges the importance of accounting for sales tax in any jurisdiction where your business has a presence.
Eligibility requirements are typically best spelled out by state legislation. You should contact the appropriate tax authorities in a given state to learn if you are required to collect sales tax there.
If you ship your goods or inventory to a major online retailer, they will be distributed to clients on your behalf, giving you “connections” outside your home state.