Sales Tax Compliance for Multi-State Sellers

Rapid growth and innovation in the e-commerce sector have made it increasingly common for both individuals and businesses to trade across state lines. While expanding into new markets can be highly profitable, navigating varying sales tax obligations can be complex. A strong understanding of U.S. tax laws, particularly those related to state nexus and tax apportionment, is crucial to avoid costly penalties if you operate as a multi-state seller.

Understanding Sales Tax Nexus

Sales tax is a government-imposed consumption tax on the sale of goods and services. It’s typically withheld by the seller at the point of sale and then passed on to the government.

Sales tax rates vary by state, and some states exempt certain products from this levy. But how do you know if you’re liable for sales tax in a specific state? Generally, it’s triggered when your business has a physical or economic presence in a state, whether through a physical location or workforce. This is known as your nexus.

Sales tax rates vary from state to state, typically ranging from 2.9% to 7.25%.

Sales Tax Collection and Remittance

Each state sets its own revenue and transaction thresholds for economic nexus. For example, in Washington, you must collect sales tax for annual sales exceeding $100,000 or involving 200 or more separate transactions. In contrast, states like Oregon have no general sales tax, so you wouldn’t need to collect or remit sales tax there. However, once nexus is established, you must register with the state’s tax authority and begin collecting sales taxes.

How is the tax rate determined?

In an origin-based sales tax system, practiced in states like Texas, you pay tax based on your location as the seller. This means you collect sales tax at your local rate. In destination-based tax states, the sales tax rate of the buyer’s location applies, which can become complex if you sell to customers across multiple locations.

Special Considerations:

• Each state sets specific revenue and transaction thresholds for economic nexus.
• Not all products and services are taxed equally across states. For example, digital goods are taxable in California but exempt in Florida.
• Certain states offer exemptions for specific products or transactions. For instance, New York exempts clothing and footwear priced under $110, while grocery items are generally tax-exempt in Pennsylvania.

Sales Tax Exemptions and Certificates

An exemption certificate is a form that buyers provide when claiming a tax-exempt purchase. Typically, buyers such as non-profit organizations, government agencies, and educational institutions may qualify for these exemptions, though the specifics vary by state.

To comply with exemption rules, you must collect valid exemption certificates from all qualified buyers.

Best practices:

• Stay informed of state-specific exemption rules to maintain compliance.
• Verify certificates to ensure they are complete and valid. Some certificates require periodic renewal.
• Store certificates securely for easy retrieval during audits.
• Use software like QuickBooks to streamline tax calculations and facilitate compliance. 
• Partner with a tax professional to reduce the risk of errors and avoid potential penalties.

At Fusion, our CPAs can help you implement controls and processes to maintain compliance. From ensuring accurate financial records to managing your taxes, our team can help alleviate some of the administrative roadblocks. Contact us today.