Mark Faggiano is the founder and CEO of TaxJar, a service built to make sales tax compliance simple for eCommerce sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
Even before you were an online seller, you probably noticed that weird little “sales tax” percentage tacked on to your purchases at the store. This could be everything from a nice round number like 4% to a rather off-the-wall amount like 7.35%.
As an online seller, you likely know that you need to charge at least some of your customers a sales tax. But why those particular amounts? Let’s have a look.
The Anatomy of a Sales Tax Rate
State sales tax rates – Forty-five states and the District of Columbia have a sales tax. States legislatures set a sales tax rate, generally between 4 and 7%, and use the money collected to pay for state budget items like roads. A few states stop there. For example, if you have sales tax nexus and must collect sales tax from buyers in Indiana, you would just charge all Hoosiers the 7% sales tax rate and leave it at that. Here’s a list of other states with no local sales tax rates.
Local sales tax rates – Local rates are where things started to get a little more complicated. Cities, counties, and other local areas want tax money to pay for budget items, too, and most states allow for these areas to also require a sales tax in addition to the state rate.
For example, if you walk into a store to buy a toothbrush in Mahopoc, NY (zip code 10541) you would pay the price of the toothbrush plus the 4% New York state sales tax rate, the 4% Putnam County rate and the 0.375% Metropolitan Commuter District Tax, for a total of 8.375% in sales tax.
How to Collect the Right Amount of Sales Tax
Fortunately for Amazon FBA sellers, Amazon’s sales tax collection system is fairly sophisticated. Once you set up your sales tax rates in your Seller Central account (and don’t forget the product tax codes!) you should be all set to collect the right amount of sales tax.
We’ve also put together instructions for setting up your sales tax collection if you sell on other platforms like Shopify, Bigcommerce, Woocommerce, Magento or Square.
And if you run your own shopping cart or online marketplace, TaxJar has your back with our SmartCalcs sales tax API. Not only do we deal with the vagaries of sales tax at the state and local level, we handle the complex aspects of sales tax like shipping taxability and product-level taxability that were way too detailed to cover in just one blog post!
Have a question about how sales tax rates work? Start the conversation in the comments or visit us at TaxJar.com.