Why combined state sales tax rates won’t cut it for your business

In most states, businesses have to collect the sales tax rate in effect at the delivery address (for online sales). In 37 states, this includes local taxes. A handful of states, including Alabama and Texas, have a single sales tax rate for remote sellers (if you apply to collect it). It can be difficult to know which taxes your business should collect and remit.

Even if you fail to charge your customers the correct tax, you’re still on the hook for that amount. Failure to properly collect and remit sales tax for your business can result in fines and late fees in addition to the uncollected tax.

If you have customers across multiple states and sales tax jurisdictions, your chances of making a tax mistake are that much higher. In this article, we’ll cover some of the frequently asked questions about state and local sales tax, plus how to stay tax compliant when you sell online.

What’s the difference between state and local tax rates?
What are some types of local tax rates?
How do state and local tax rates affect online purchases?
What if I sell on a marketplace?
How can I make sure I’m getting sales tax right? 

A customer at the register (or at online checkout) might not know how much of the tax they pay goes to the state or the local jurisdiction, but the business in charge of collecting it should. Forty-five states and the District of Columbia levy sales tax on all goods and some services. Those rates are generally straightforward and easy to find online. But 37 states allow localities to charge sales tax on top of the state tax rates.

Some of these taxes include:

• Special purpose districts
  Sometimes local governments levy their own taxes. Special purpose districts are temporary government units that levy taxes to pay for public services, like fire protection and libraries. 

• Local special sales tax
  Some cities, including San Francisco, have special tax rates for specific goods and services, like restaurant meals, hotel stays, rental cars, and parking, that are higher than the general sales tax rates. 

• Home-rule states
  In a few states, including Alabama, Alaska, Colorado, and Louisiana, many local governments levy and administer their own local sales and use taxes. Some states make tax compliane for remote sellers easier than others; Alabama offers a Simplified Sellers Use Tax (SSUT) for businesses selling into the state, while Colorado has nearly 70 self-administered tax jurisdictions for remote sellers to keep track of.

• Urban Enterprise Zones
  Some cities in New Jersey are “Urban Enterprise Zones,” places with a much lower rate than the statewide sales tax (half of the state’s 6.625%). These zones were created to help revitalize designated communities and stimulate economic and business growth. 
  

For the most part, sales tax is based on the shipping address. This is called destination sourcing because sales tax is sourced to the destination of the goods, which means the sales tax rate your business should charge at checkout will change based on where the goods are being shipped. But if you think that a quick internet search of “state sales tax in Texas” is enough to stay tax compliant, think again. Local sales tax rates are subject to change and can be hard to find online. 

Selling on marketplaces like Amazon or Etsy is a great way to expand your customer base, but it can also throw a wrench in your sales tax compliance strategy. All states with a general sales tax require marketplace facilitators to collect and remit sales tax on behalf of the marketplace seller. Make sure you’re aware of the laws in the states you’re selling into. 

Your ecommerce platform can play a big role in helping you stay tax compliant, too. Platforms like Magento, Shopify, and WooCommerce are a popular alternative (or addition to) selling on marketplaces, but they don’t all automatically collect sales tax. Learn more about what ecommerce platforms can do for you.

Calculating state and local sales tax can get complicated quickly. If you’re managing tax compliance manually for your business, you’re probably losing a lot of time and money looking up tax rates and searching the web for answers.

We compiled all the current state and local sales tax rates in a free sales tax rate table. Download the table to get the most up-to-date local sales tax rates in your area.

And if you want an automated solution, learn more about Avalara AvaTax. With our automated tax compliance software, you can quickly and easily calculate sales and use tax, VAT, and GST across industries and tax types.