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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 an eCommerce 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 nexus. All states have a slightly different definition of nexus, but most of the time states consider that a “physical presence” or “economic connection”, based on sales into that state, creates nexus.

Even after you have done the research to understand where you have nexus, then how much do you charge? Does it vary from customer to customer? And why does this have to be so complicated?

And more importantly, is there a solution that can automate everything so WooCommerce customers don’t have to deal with any of this? The good news is, yes there is!

First, we’ll explain a bit about how sales tax works, and then we’ll show you how you can use TaxJar to automate the entire process so you never have to stress about sales tax again.

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.

If you’re a growing eCommerce business with multiple sales channels (WooCommerce, Amazon, Walmart, etc.), and want to take advantage of fully automated sales tax and filing services, we recommend you choose TaxJar.

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: in most cases you will just 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 1.25% 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

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%.

An example of origin-based sales tax rules in effect

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).  This also most often the case for remote sellers in the states when you have nexus. More on this later.

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.

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

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. Now, not only does physical presence (such as a location, employee or inventory), but “economic” presence in a state creates sales tax nexus. Economic nexus is created when a business sells enough into a certain state. State laws on economic nexus vary. The sales thresholds vary from $10,000 to $500,000 in sales, and some states don’t have a transaction threshold at all. You can read more on economic nexus laws here.

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.
  • If you are considered a “remote seller” in an destination-based state, and have nexus in that state, you’ll probably be required to charge sales at the total combined sales tax rate of your customer’s location.

Remote sellers example

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.

These states say shipping charges are not taxable if you show the charge separately from the selling price of the item. They are taxable if you include the charge as part of the price of the item.

  • Alabama
  • Arizona
  • California
  • Idaho
  • Iowa
  • Louisiana
  • Maine
  • Maryland **
  • Massachusetts
  • Missouri
  • 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.

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.

TaxJar’s WooCommerce sales tax plugin is perfect for merchants who want to:

  • Implement real-time updates to their sales tax rates at checkout
  • Automate their sales tax filing
  • Get sales tax data from multiple channels in an easy-to-read, return-ready state reports 

TaxJar’s solution can also: 

  • Provide economic nexus insights, with recommended steps to begin complying with in any new state
  • Handle and scale with any uptick in demand increase, such as seasonality or special deals
  • Allow for easy management of customer and product exemptions

What about help with filing my sales tax returns with the state?

As many sellers come to find out, collecting the right amount of sales tax is just the beginning. Once your cart is setup, you’ll then need to choose how to remit the sales tax you’ve collected back to the state.

To manage sales tax for your business, you have a few options:

  • Handle it all yourself. We recommend making a calendar to track your due dates and when the time comes to file, log in to the state’s website(s) and enter the information to complete your return. 
  • Choose a recommended WooCommerce partner, TaxJar, that can fully automate everything for you.
  • Hire a sales tax accountant to help you manage everything for you.

Here’s how it works if you choose to lean TaxJar to manage your sales tax:

Want to learn more about installing the WooCommerce sales tax plugin from TaxJar? Check out their installation guide

TaxJar will connect directly to your WooCommerce store (and anywhere else you sell like Amazon or another marketplace). Next, they will import your transaction data into a single sales tax dashboard organized by the amount collected, and determine where you have nexus. This is helpful to eCommerce merchants because you’re able to see the full picture of your sales tax in every state at one glance.

At this point, TaxJar will now be able to instantly provide you with accurate sales tax rates at checkout. Never update a rate table again.

Once your dashboard is connected, you can then choose how you’d like to manage your filings. You have a choice to enroll in AutoFile where TaxJar will submit your returns to the state every time they are due, or handle them on your own. 

Visit TaxJar to get a free demo or to learn more about how TaxJar helps WooCommerce merchants. If you’re spending too much time managing sales tax, lean on TaxJar and get back to growing the business you love.

Want to get started now? Call 855-800-6681.

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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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