Keeping Up With U.S. Sales Tax Rates Can Be Like Falling Down a Rabbit Hole

September 5, 2017

in Stay in Compliance

Authored by Sacha Wilson

Sponsored by Avalara

Keeping Up With U.S. Sales Tax Rates Can Be Like Falling Down a Rabbit Hole

At first glance, it would seem like a very simple thing to add sales tax to your company’s eCommerce transactions. But as you dig a little deeper into what this actually entails in the United States, it conjures up a quote from Alice’s Adventures in Wonderland, where everything appears ‘curiouser and curiouser.’

What You Need to Know Now About the U.S. Sales Tax Rates:

Paying taxes the American way is truly about as baffling and confusing as a trip through the “looking glass.” There are over 14,000 U.S. tax rates which are constantly changing. In fact, there are an estimated 5,000 tax rate alterations a year and a staggering 400 changes a month.

Why are there so many different rates? And how do they impact your eCommerce transactions? There are many different factors that will affect your sales tax calculations in those 50 states.

How Do Americans Calculate Sales Tax?

The quick answer? It depends. There are several different factors that can influence your sales tax rates:

  • State sovereignty, where each of the 50 states has the individual power to execute, impose and collect specified taxes
  • Essential goods, which are defined as food items purchased for home consumption that are deemed exempt from taxes
  • Luxury goods, which are defined as non-essential, such as dining out in restaurants. (And the line between “essential” and “luxury” is easily blurred.)
  • Location-based rates that are defined by an address and extend beyond the individual state or zip code
  • Sales tax nexus (enacted in 2016), that requires out-of-state businesses to collect state taxes on product sales, even if they do not have a physical presence there
  • Exemptions, that may apply to unique tax rates for shipping locations or tax-exempt customers
  • Tax holidays, which provide a temporary reduction or reprieve from a tax on specified dates within individual states

…just to name a few!

Remember, rate changes can occur at any time of the year.

According to the 2017 SalesTaxHandbook, “There have been 698 local sales tax rate changes in states, cities, and counties across the United States.”

A Few of the “Curiouser” Tax Rates:

When it comes to opinions on sales taxes, the States are anything but united. Just to illustrate, here are a few examples of how eCommerce shopping carts vary widely:

  • The sales tax is not defined for eBooks purchased in Alabama, Arizona, Colorado, Florida, Hawaii, Idaho, Maryland, Massachusetts, Missouri, New Mexico, South Carolina, and Virginia are not subject to tax laws
    • eBooks are considered exempt from taxes in California, Georgia, Iowa, New York, and Rhode Island
    • Yet, sales taxes do apply to ebooks purchased in Connecticut, Indiana, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Nebraska, New Jersey, North Carolina, Ohio, Pennsylvania, South Dakota, Texas, Utah, Washington, Wisconsin, or Wyoming
  • Childrens’ nappies and organic bedding are subject to a sales tax in Maine; however, organic bedding for animals is exempt from tax
  • A box of chocolates is classified as ‘candy,’ unless it contains flour and/or requires refrigeration. It is taxed in Florida, Illinois, New York, and Texas. It is exempt from sales tax in Arizona, California, and Pennsylvania.

Confused? Well wait, things could go through another metamorphism soon.

What Could Change in 2017 and Beyond?

In an effort to level the playing field between brick-and-mortar stores and online retailers, there are a number of proposed sales tax changes. With states feeling the pinch to balance their budgets, there’s an added incentive for them to claim millions from these incremental transactions.

Amazon recently agreed to collect sales taxes in Washington, D.C. and 45 additional states with a general sales tax.

Though Amazon stands to benefit from everything purchased there, they are technically not the seller for its Marketplace transactions, which represent 50% of its sales. However, a few states do not concur with Amazon’s position on third-party sellers. In fact, South Carolina wants to impose $12 million on Amazon for uncollected sales taxes, interest, and penalties in the first quarter of 2016.

We expect to hear about more about the Marketplace Fairness Act (MFA), the Remote Transactions Parity Act, the Online Sales Simplification Act and the No Regulation Without Representation Act in the coming months.

Your Transactions Can Still Have a Happy Ending

Though the U.S. has some notably strange rules and procedures concerning sales taxes, there is still every reason to expand your business to the U.S. However, there is no need to devote incalculable amounts of time and money to train your staff on all the nuances of the U.S. sales tax system.

In fact, it couldn’t be simpler. With Avalara, you’ll have automated end-to-end sales tax compliance solutions that work seamlessly with your eCommerce transactions ensuring you are charging the right rate, filing the right amounts to the right people at the right time. So you can focus on driving traffic to your site and fulfilling orders.

Of course, you could try to download and decipher all those rate tables to implement 14,000 U.S. tax rates on your own and fill in various forms for each state. But if you want to minimize your audit exposure and maximize every sales opportunity, be sure to trust Avalara for its eCommerce tax solutions whenever you’re doing business in America and beyond.

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