The world needs face masks: what you need to know about sales tax when selling new products
Updated December 2020 to clarify the taxability of face masks in Pennsylvania.
Face masks are must-have accoutrements these days because of the new coronavirus (COVID-19). Demand for them has skyrocketed, causing supply shortages, price gouging, and an explosion of DIY projects. Entrepreneurial individuals and businesses are taking on mask making and selling, just as many breweries and distilleries are now producing hand sanitizer alongside beer and bourbon.
When producing or selling a new product for the first time — or when sales of existing products suddenly soar — it’s essential to consider sales and use tax.
Cloth face masks worn over the nose and mouth to protect people from spreading sickness are generally subject to retail sales tax in most states. In fact, they’re exempt (i.e., not taxed) in very few*:
Face masks are also exempt in Pennsylvania. According to a Pennsylvania Department of Revenue notice dated October 30, 2020, "Prior to the COVID-19 pandemic, masks sold at retail were typically subject to Pennsylvania sales tax. However, masks (both cloth and disposable) could now be considered everyday wear/clothing as they are part of the normal attire. Generally speaking, clothing is not subject to Pennsylvania sales tax."
Puerto Rico is providing a temporary sales tax exemption for face masks and certain other products through April 30. Because these items are usually taxable, businesses that sell into Puerto Rico may still need to register with the tax department and comply with sales tax laws.
Whether a business needs to obtain a sales tax permit and collect and remit sales tax depends on nexus.
Nexus is a connection between a business and a tax authority. When a business has nexus with a state, that business is required to register with the tax authority and collect and remit applicable taxes. Businesses without nexus don’t have that obligation.
There are several ways to establish nexus; two of the most common are:
- Having a physical presence in the tax jurisdiction (physical nexus)
- Having economic activity in the tax jurisdiction (economic nexus)
If you’re new to business and you’re selling face masks (or other taxable products) in your community for the first time, you likely need to obtain a sales tax permit and start collecting and remitting tax on your sales. Some states allow an exception for casual sales, like a one-time garage sale, but ongoing sales generally require a permit and tax collection. When in doubt, contact the state department of revenue and local government.
Once registered, tax generally applies to sales made anywhere in the state, including phone or online sales.
If you broaden your market by selling online, you could trigger an obligation to collect sales tax in states where you have no physical presence.
Most states now enforce economic nexus, which bases a sales tax collection obligation solely on sales and/or transaction volume in the state. Of the 45 states with a statewide sales tax, only Florida and Missouri have not adopted economic nexus. Even some communities in Alaska enforce economic nexus for local sales tax.
Determining whether economic nexus has been established is tricky because each state’s economic nexus law is unique. For example, economic nexus is established as a result of:
- One sale into Kansas
- More than $500,000 in total combined sales of tangible personal property in California
- More than $300,000 in cumulative total gross sales and more than 100 transactions in New York
Most states have an economic nexus threshold of $100,000 or 200 transactions. In other words, selling one mask to 200 different people in a state could trigger economic nexus, even if each mask sold for only $10.
Details about each state’s economic nexus thresholds are available in this state-by-state guide to economic nexus laws. If you think you may be at risk of having economic nexus already, take this free sales tax risk assessment.
Selling through a marketplace
According to Etsy, “face mask” was the most frequently searched term during the first two weeks of April. The global marketplace for handcrafted items and other products has even added new categories for the face masks people are buying to help slow the spread of COVID-19 to differentiate them from skincare face masks.
Only face masks that are made by hand may be sold on Etsy. Other marketplaces may allow sales of commercially made masks, but sellers new to the marketplace may need to be vetted. Price gouging forced Amazon to block new offers of face masks and certain other products in mid-March.
Marketplaces are responsible for collecting and remitting sales tax on behalf of their third-party sellers in more than 40 states and Washington, D.C. Yet marketplace sellers may still be required to obtain a sales tax permit and file returns. It depends on the state, and each state’s marketplace facilitator law is different. For state-specific details, see this state-by-state guide to marketplace facilitator laws.
Be flexible and conscientious
Some clothing manufacturers have been able to quickly shift gears when COVID-19 disrupted their normal business. New York–based seamstresses working for fashion designer Christian Siriano began making masks in late March. Los Angeles Apparel is now producing both masks and gowns. Virginia-based swimwear manufacturer Karla Colletto is making the changes necessary for employees to produce masks and gowns while adhering to social distancing safety measures.
These and other businesses may be selling directly to consumers for the first time, rather than making wholesale sales to retailers. Some may donate much of what they make or sell to exempt entities such as health care providers. Although initially some may not have been able produce the medical-grade protection recommended for medical professionals, some have said they plan to transition to medical-grade masks in the future.
Each of these scenarios has different tax implications, depending on the company and the circumstances. Before going too far in a new direction, it’s best to consult with a trusted tax advisor or state tax authority to ensure what needs to be done is done. Although many states are providing temporary tax relief for businesses adversely affected by COVID-19, they’re in need of tax revenue and will eventually come looking for the tax due.
*There’s no statewide sales tax in Alaska, Delaware, Montana, New Hampshire, and Oregon, though approximately 100 communities in Alaska have a local sales tax.
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