The way states determine product taxability for clothing and apparel is a hot mess and, unfortunately, you can’t skirt the issue. Better to outfit yourself with a few basic tricks of the trade to make compliance easier. Here are 4 sales tax traps to look out for if you’re a retailer:
- Expanding nexus: Nexus (the connection between a state and a retailer that triggers a sales tax obligation) is no longer just about where a company has headquarters or warehouses. Multi-state clothing and apparel merchants, sellers expanding into new states, companies offering new products—in short, most retailers are likely to have sales tax obligations in many jurisdictions under nexus laws. Some retailers are caught with unexpected sales tax obligations when they use an affiliate website to advertise (and ultimately sell) products. Another trap: drop-shipping. Delivering a product using a drop shipper to certain states can create nexus. Florida is one example.
- Holidays aren’t just for Santa: State departments of revenue love sales tax holidays. They spur economic growth and can also trap retailers unaware. While most business-to-business sales are typically not subject to sales tax holidays, sales to consumers often are. Though sales tax holidays cluster around back-to-school and Christmas, some states use one-off holidays to boost sales of appliances such as air conditioners in the summer. Given that states frequently do not announce holidays until close to the actual period in question, it is incumbent on retailers to stay up-to-date with applicable rules.
- Tricky tax exemptions: Think you know whether that clothing or apparel item your company sells is exempt from sales tax? Think again. Depending on the state, belts could be taxable, as could hard hats or choir robes. In other states, those items might be tax-exempt. Minimum prices, end use of product, time of year, status of the purchaser, all have bearing on the obligation to collect sales tax. And then there’s the matter of managing exemption certificates for each sales tax-free transaction, an exercise requiring more than shoving paperwork in a back room file cabinet.
- Garbage in, garbage out: More and more clothing and apparel is sold online and on mobile devices. Multi-channel sales are tricky from a sales tax perspective. With each channel there are potentially nexus-creating elements that change the sales tax game entirely. The growing effort by states to broaden how sales tax is charged, remitted, filed and calculated, means clothing and apparel retailers need more than an Excel table to get sales tax right. Finding the right data source to identify applicable rates and rules requires a level of expertise most merchants don’t possess. By outsourcing sales tax management, companies can avoid these common sales tax traps.
Learn more by reading the free whitepaper “The Naked Truth About Clothing & Sales Tax.”