Apparel and sales tax: a guide for online sellers
Selling clothing online is big business, and it’s only going to get bigger. Online clothing sales revenue in the U.S. is projected to grow from $44.7 billion in 2014 to $86 billion by 2018, according to eMarketer.
This demand and growth can provide big opportunities for small businesses. However, online sellers need to be aware that clothing sales can be tricky when it comes to sales taxes.
Know your nexus
As with any sales tax issue, the first step to getting your sales taxes right is knowing your nexus. This can be easier said than done, but it’s essential. You are obligated to collect taxes in the state where you have nexus, so those are the states where you need to be aware of all the sales tax rules for clothing. Those rules can be very different in each state, with plenty of quirky one-off exceptions and constant changes to keep things very interesting for anyone trying to keep track and comply.
States where clothing is generally taxed (with exceptions)
Most states consider “general use” clothing taxable, although several of those states exempt certain categories of items.
For example, some exemptions include providing clothing to the needy (California, Idaho and Tennessee), protective clothing and gear (Ohio, South Carolina and Virginia) and apparel used in motion pictures (Mississippi). In Connecticut, meanwhile, apparel priced under $50 is exempt, while apparel that costs $1,000 is subject to a luxury tax.
States where clothing is not taxed (with exceptions)
States that do not consider clothing sales taxable include Alaska, Delaware, Montana, New Hampshire and Oregon (which do not have sales taxes at all).
Other states that exempt clothing from sales taxes (with exceptions from the exemption) include Massachusetts, Minnesota, New Jersey, New York, Pennsylvania, Rhode Island and Vermont.
Again, exceptions and special rules abound. For example, some states only exempt clothing from sales taxes up to a certain dollar amount, including Massachusetts ($175), New York ($110) and Rhode Island ($250).
Meanwhile, athletic clothing is considered taxable in Massachusetts, Minnesota, New Jersey, Pennsylvania, Rhode Island and Vermont, and fur is considered taxable in Minnesota, New Jersey and Pennsylvania. Protective gear is considered taxable in Minnesota, New Jersey, Rhode Island and Vermont. In Minnesota, New Jersey, Pennsylvania, Rhode Island and Vermont, accessories are taxable, while in Pennsylvania, formal clothing is subject to tax.
These are examples of just some of the rules exemptions that states have for clothing, so it’s crucial to stay up to date on all the latest details for the states where you have nexus.
Local tax jurisdictions can sometimes impose their own taxes, so that’s something to look out for as well. For example, in New York State, general use clothing is exempt from local sales tax if under $110. However, this only actually applies in practice in New York City and a few counties, because the other localities in the state impose local sales and use tax in place of the state sales tax.
Sales tax holidays
Sales tax holidays—specific periods of time when states exempt certain items from sales tax —can throw a wrench into clothing sales taxes as well. Many states offer tax-free shopping for clothing and other items for back to school or major holidays, for example. These holidays can vary from year to year and often are not announced until relatively close to the date the holiday starts.
Solutions for small businesses
More and more customers are buying apparel online, and this represents an opportunity for small sellers. However, small sellers also may have less time and resources to invest in the research it requires to get sales taxes on clothing right, given all the different rules and exceptions and how often they can change.
If you do get your sales tax rates wrong, on the one hand, you could face the risk of penalties, fines and audits if you undercollect, and on the other hand, customers will be understandably unhappy with your service if you overcollect. Either of these scenarios can be a big blow to a small business.
One way for small businesses to deal with the challenges of apparel sales tax is automation. Avalara Returns for Small Business simplifies the sales tax returns process, from preparation and filing to remittance. Reduce sales tax return prep time and eliminates the hassle of filing with each state website — all through a self-serve and easy-to-use application.
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