Sales tax fundamentals for e-commerce sellers
This article is for those who are new to sales tax, here we will explain in simple words how it works.
You started your online shop and going to sell online to USA buyers. If you have a warehouse you need to register for a sales tax permit in a state where you have a warehouse and store your goods. Check here if your state has a sales tax. If you don’t have a warehouse and exploit the drop-shipping model please read another article.
If you store your goods outside of the USA please read the import section of this article.
In the USA a sales tax is a tax established not on the country level but at the level of the state. That means that it differs from state to state significantly. In most states, sales tax consists of several parts: state rate + county rate + city rate + district rate. That means that for each location within a state tax rate will differ. To be able to calculate tax rates you need to know a customer address or postal ZIP. You can use our tax rate API or free tax calculator to get tax rates for specific ZIP.
When to calculate?
But don’t be afraid about so many rates in the US. It is not as horrible for a startup as it seems at the beginning. You only need to charge a sales tax in those states where you have sales tax permits. If you don’t have a sales tax registration in the state of the buyer you must not charge any sales tax.
When do you need to register for sales tax?
- You need to register immediately in those states where you store your goods or have employees;
- You need to register in a state where your sales reached the economic nexus. You can check here thresholds for each state.
For example, a business registered in Delaware has a warehouse in Missouri that sell goods to a Californian customer with a $150 order. This business needs to obtain a sales tax permit in Missouri. There is no obligation to register in CA for sales tax until revenue reached 500,000. And there is no obligation to charge sales tax either.
You can use the Lovat platform to track your economic nexus for free.
Exemptions differ from state to state, here are some examples of what might be exempt:
- Custom computer programs;
- Food products;
- Newspapers and periodicals.
B2B sales to a reseller are also exempt. To be able to give a business buyer invoice without sales tax you need to collect from them an exemption certificate for such a purchase. Note that here you also need to follow the destination principle – the delivery address (state) must match the exemption certificate state.
Import to the US
If a seller stores goods outside of the US and sends goods in parcels to US customers, this seller is not obliged to charge sales tax if they sell below the state’s thresholds. As soon as revenue reaches the threshold a seller needs to register and charge sales tax.