The top 3 sales tax traps
- Apr 26, 2017 | Laura McCamy
The people who wrote sales tax regulations didn’t set out to create sales tax traps to snare ecommerce sellers, but it can sure seems that way. Here are the top three sales tax traps that cause headaches (and cost money) for online businesses.
1. Zip codes vs. geocodes
To understand this sales tax trap, you have to know the difference between origin-based states and destination-based states. In an origin-based state, ecommerce sellers charge sales tax based on the rate in effect at the location from which the order was shipped. In a destination-based state, sales tax is calculated based on the customer’s local sales tax rate.
In destination-based states, you can’t use zip codes as a proxy for local tax rates. A single zip code may cross the boundaries of two or more tax jurisdictions. Even next-door neighbors or houses across the street from each other can have different sales tax rates.
Sales tax jurisdictions are never determined by zip code. The best way to avoid this sales tax trap is to use sales tax automation software that maps the boundaries for local sales taxes and can provide the correct local tax rate for each ship-to address.
2. My tax rate is the only rate
You will fall into this sales tax trap if you assume that the concept of origin-based sales tax applies across the country. You might think that if you ship an order from Chappaqua, the sale took place in New York and you just need to collect and remit New York sales tax at your local rate. There’s no way to say this nicely: That is just so wrong.
When you ship orders to other states where you have sales tax nexus, you need to charge the sales tax rate that applies to sales in those destinations. In origin-based states where you have sales tax nexus, you might owe the same rate for all sales in that state. In a destination-based state like New York, you need to collect and remit sales tax at the rate that applies at your customer’s address. To complicate things, some origin-based states allow remote sellers to calculate sales tax based on the destination.
Yes, this is complicated. No, you don’t have to figure it out on your own.
3. One sales tax rate for the whole state
Let’s say you’ve been selling locally in Chappaqua for a while and you’ve been charging your customers the Chappaqua, New York, sales tax rate and filing sales tax returns. Then you jump into the ecommerce world and ship to customers around the state. If you ship an order to Ithaca and you charge Chappaqua’s sales tax rate, you’ve just fallen into a sales tax trap.
There are a few states with a single sales tax rate and no local taxes. When you look at a map of US sales tax rates, however, it looks like a patchwork quilt with a lot of tiny patches. Most states have many different tax rates, as cities, counties, and special taxing districts add their own sales taxes. Unless you’re in single rate state like Michigan or an origin-based state like Illinois, you’ll need to calculate each customer’s tax rate based on their location--and don’t use their zip code (see sales tax trap number one.)
When it comes to ecommerce and sales tax, it’s dangerous to make assumptions. If you think you know everything you need to know, you probably don’t. It’s not your fault;: sales taxes across the U.S. are nothing but confusing. It’s okay to ask for help.