One of the benefits of being an online retailer is that you can do business with just about anyone in the world. But, that also means you’ve got one more step to complete than many of your brick and mortar counterparts–you’ve got to figure out how to get the products in the hands of your customers. In addition to that, you might need to collect sales tax on the shipping charges you charge your customers.
Knowing the State Rules
The first thing you should know is that sales tax laws differ by state. You’ll need to pay attention to the rules for your nexus states. Nexus states are the states that your business has a significant attachment to–the ones where you have physical locations, employee staff, store your inventory, or have distributors.
Once you’ve figure out which state rules you have to follow, it’s pretty easy to find the rules on sales tax on shipping charges. Most states keeps the information on their sales tax assessor’s website. It’s usually called something like the Department of Revenue or Tax Authority. Here’s a list of states where shipping charges are taxable and non-taxable.
Separating Costs
A general rule of thumb is that if an item is not taxable, the shipping on the item is also not taxable. Depending on the state that might include items for resale or exempt classes of products. For instance, most clothing is tax exempt in the state of New Jersey. On the other hand, California doesn’t charge sales tax on grocery items.
So what happens if you have an order to ship that includes both taxable items and nontaxable items? Most states would prefer you to ship those items separately. This will make easy to separate shipping costs and add tax onto the appropriate shipping charges.
But if you can’t separate the items (because that’s just silly), you’ll probably have to separate the shipping costs on your invoice. Let’s say you’re shipping a teddy bear and a pair of socks in the state of New Jersey. You need to collect sales tax on the teddy bear but not the socks. You also need to provide an invoice, clearly separating the taxable items from the nontaxable items.
So, you’d list the teddy bear, its shipping costs, and the sales tax for those items in one area. Then, you’d list the socks and its shipping costs in another area. The idea is that if any layman (or, in the worst case scenario, an auditor) were looking at your invoice they could clearly see what was taxable, what was not, and the amount of tax paid.
Managing Your Software
The days of calculating your sales and tax totals by hand are long gone for most retailers. Your point of sale or online cart software does the heavy lifting for you. You just have to make sure your settings are correct. Most of the major shopping cart software has sales tax built right into the application. Depending on your state’s rules, it could be as simple as checking a box to charge sales tax on shipping. But it could also require some customizations on the back end.
Fortunately, TaxJar has a comprehensive set of guides to the most used marketplaces and popular shopping cart software. Browse it to find the one you use and learn how update the settings so that you’re collecting shipping sales tax the right way.
Do you have questions or something to say about when to charge sales tax on shipping charges? Start the conversation in the comments!
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