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How to charge your customers the correct sales tax rates

Written by Mark Faggiano on December 28, 2015 Blog, Physical goods.

So you get that as a store owner, you need to be sales tax compliant. This means that in the United States specifically, you have to charge sales tax to buyers in states where you have sales tax nexus.

But how much do you charge? Does it vary from customer to customer? And why does this have to be so complicated?

While determining the right rates to charge can be tricky, a little reading will help you wrap your head around it in no time. Today, we’ll explain the different sales tax rates in the United States, and help you figure out which rates to charge your customers.

Let’s get started.

Determining the right tax rate to charge is tricky

45 states and Washington D.C. all have a sales tax. It’s remitted back to states and local areas to pay for things like public safety, roads, and other state budget expenses. Sales tax is governed at the individual state level, so tax rules and regulations are slightly different from state to state.

A handful of states are fairly simple. They have one statewide sales tax rate, which generally ranges from 4-7% — meaning you only need to charge that single rate when you have nexus.

Example: You’re a seller of sci-fi memorabilia living in Connecticut. Since you live there, you have sales tax nexus in that state. Since Connecticut only has a statewide sales tax rate and no local rates, your life is simple: you charge the 6.35% statewide sales tax rate on all sales.

Setting up taxes for these states isn't too tricky. But there's a catch. (Image credit: Ali Edwards)
Setting up taxes for these states isn’t too tricky. But there’s a catch. (Image credit: Ali Edwards)

But… most states make life a lot more complicated. They not only have a single statewide rate, but also allow local areas to tack on additional tax rates. It’s for this reason that you may end up charging your customers some combination of a state, county, city, and “special taxing district” taxes when making a sale.

Example: You sell skincare products from your home in Obetz, Ohio. Ohio is an origin-based sales tax state (more on that in just a second), so your sales tax rate in Obetz is 7.5%. That’s made up of the 5.75% Ohio state sales tax rate and the 1.75% Franklin County rate.

As you might have guessed, this can get even more complicated if you sell or have nexus in an area that has sales tax, county tax, and city tax.

The “monkey wrench” for online sellers: origin and destination-based sales tax

Then there’s another wrench to throw into the equation.

When it comes to shipping products, some states are origin-based sales tax states and some are destination-based sales tax states. This can also affect whether or not you charge tax, and how much you charge.

Where you live can have a huge impact on what you charge.
Where you live can have a huge impact on what you charge.

Let’s go over this in a little more detail.

Origin-based sales tax

Origin-based sales tax is fairly simple. If you have home-state nexus in a state (i.e. your company is based there) and you sell a product to a buyer in that state, you pay sales tax at the sale’s point of origin (i.e. your location).

The states that use origin-based sales tax rules are:

  • Arizona
  • California*
  • Illinois
  • Mississippi
  • Missouri
  • New Mexico
  • Ohio
  • Pennsylvania
  • Tennessee
  • Texas
  • Utah
  • Virginia

* – In California, state, county, and city taxes are based on the origin, but district taxes are based on the customer’s location. This is the only state with this rule.

If you live in one of these states and sell to a customer in the same state, you only have to charge sales tax at the rate of your location. (You can look up your local sales tax rate by entering your zip code + 4 in TaxJar’s Sales Tax Calculator.)

Example: You live in Irving, TX but make a sale to a buyer in Archer City, TX. Even though you’ve made a sale to a person in an entirely different taxing jurisdiction, you would still charge them the combined Irving sales tax rate of 8.25%. This rate is made up of the 6.25% Texas state rate, plus the 1% Irving sales tax rate and the Dallas Metropolitan Transit Authority (MTA) rate of 1%.

Caption here
An example of origin-based sales tax rules in effect.

Destination-based sales tax

Destination-based sales tax states are more complicated, and also more common. In these states, you charge sales tax based on the rate at your customer’s location (that is, their “ship to” address).  

Example: You operate your business out your warehouse in Stamford, NY, and sell an item to someone in Buffalo, NY. Since New York is a destination-based sales tax state, you would charge sales tax to your buyer based on their rate of 8.75%. That’s the 4% New York state rate plus the 4.75% Erie County rate.

Caption!
A destination-based state requires you to charge the customer’s tax rate, not your own.

As you can see, charging sales tax is a little more involved when you’re trying to charge tax to buyers in a destination-based state.

Collecting sales tax as a remote seller

One other important consideration has to do with being a remote seller. A “remote seller” in sales tax terms is considered someone who has sales tax nexus in a state, but isn’t based in that state. This would happen if you had a warehouse, remote employee, etc. Most of the time that this happens, destination-based tax rules apply.

How the tax rules work for remote sellers.
How the tax rules work for remote sellers.

Example: You live and operate your business in California but have hired an employee in Missouri. This means you now have sales tax nexus in both California and Missouri. Missouri is an origin-based sales tax state for in-state sellers, but in this case you are considered a “remote seller” since you are based in California.

Since you are a “remote seller,” Missouri’s origin-state sales tax rules don’t apply to you. So if you were to make a sale to a buyer in Missouri, you would charge that buyer sales tax based at their local sales tax rate — that is, using destination-based sales tax rules.

To break it down:

  • If you live in an origin-based sales tax state, charge sales tax to same-state customers at your local area’s total combined sales tax rate.
  • If you are considered a “remote seller” in an origin-based state, you’ll probably be required to charge sales at the total combined sales tax rate of your customer’s location.
Caption here
Making sense now?

This isn’t easy stuff to grasp on your first try, so check out this post for more than you ever probably wanted to know about origin-based and destination-based sales tax.

When to charge sales tax on shipping

One other thing to consider is that many states also require sales tax to be charged on shipping and delivery costs.

Example: You have nexus in Rhode Island, a state that considers shipping taxable. If you sell a $10 item to a customer and charge them $2 for shipping, then you would charge the applicable sales tax rate on the entire purchase.

On the other hand, some states, like Alabama, do not consider shipping part of the taxable transaction and therefore the shipping charges are not taxable. So if you ship the latest must-have toy to a buyer in Alabama for an item price of $19.99 plus $5.00 shipping, you would only need to charge sales tax on the $19.99 item price.

The states that don’t require you to tax shipping, handling, and/or delivery fees are:

  • Alabama
  • Arizona
  • California
  • Idaho
  • Iowa
  • Louisiana
  • Maine
  • Maryland **
  • Massachusetts
  • Nevada
  • Oklahoma
  • Utah
  • Virginia **
  • Wyoming

** – For these states, if shipping and handling fees are combined, shipping is taxable. However, if they are listed and charged separately, they are not.

If you have nexus in a state not listed above, you should be charging tax on your customers’ entire purchases, including the shipping.

Find out more about sales tax and shipping here.

Charging the right rates shouldn’t cause headaches

This stuff starts to get complex fast. Fortunately, there’s the WooCommerce Sales Tax Automation plugin from TaxJar. This plugin will ensure you charge the right amount of sales tax to every customer, whether it’s origin-based sales tax, destination-based sales tax or taxable shipping.

Do you have questions or comments about charging sales tax to your customers? Or need some clarity on how to tell if you’ve got those rates right? Start the conversation in the comments — we’d love to hear from you.

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4 Responses

  1. David
    December 29, 2015 at 8:55 am #

    Great article thanks!

    What tax should I allow for if I’m selling access to my online training course and I’m based in New Zealand?

    How would I set this up in woocommerce?

    • Nicole Kohler
      December 29, 2015 at 3:54 pm #

      Hi David! The advice in this post pertains to physical products being sent throughout the US.

      As far as New Zealand goes, typically you’d set up your course’s prices inclusive of 15% goods and services tax (GST), which is something you can do in WooCommerce. Here’s some general info on setting up taxes: https://docs.woocommerce.com/document/setting-up-taxes-in-woocommerce/#section-2

      However, if you’re selling to overseas customers and/or selling a mixture of physical and digital goods, it’s always a good idea to consult a tax professional to be 100% certain you’re charging the right rates.

      Hope this helps a bit 🙂

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