So, all of the info you read below is the summary of 6 hours I spent yesterday in gathering information about taxes in USA. – to be particular – Sales Tax. Not Income tax
To start with, USA has 50 states, meaning constituent political entity. All states have their own rules for sales tax and there is no nation-wide sales tax as such. So if you are an store owner in any particular, you will have to charge your customers taxes, which you are supposed to pay to the state.
Now when I say “charge your customers taxes”, I mean- obviously that is why you are here. There are two types of taxes based on the final location of the product after the purchase.
So there are origin based taxes and destination based taxes. Some states require you to charge customer depending upon your (seller’s) location. Summary- If you are located in an origin-based state and make sales to customers within that state, you would charge sales tax based on your location, including any local and state taxes. Example – Illinois
Destination Based tax – If you are in state A and you make a sale to a customer living in state B, you have an obligation to collect and pay sales tax of state B, ONLY if you have a Nexus in state B
Now you must be wondering Nexus, what is a nexus in tax terms? So a nexus is kind of a link of your business to/in a certain state. Lets say your business is Registered and has a brick mortar office in state X, and you sell a lot to customers in state Y. Depending upon the volume and nature of transactions, State government requires you to register a Nexus in state Y so that you can collect sales tax for State Y- as simple as that. However, terms and legislation criteria on whether you should register a Nexus vary a lot from state to state. But it usually comes in scope when you are selling 250,000+ USD in a state which is not your home state.
Home state means where you run business.
Summary: You only charge sales tax if your customer’s shipping address is in your home state i.e., where your store is. Customers out of your state dont need to pay any taxes which purchasing from you.
Now coming to tax rates:
Tax rates are honestly very confusing when talking about USA. They have unreal system of managing tax rates and enduring tax-evasion problem.
Usually states have same taxes or even some countries have a fixed tax depending upon the product hierarchy, but that is not the case with USA.
There are chances that two addresses in same pincode will have different tax rates, YES! I am NOT kidding!
As per jurisdictions, the tax rates are combined. There is a State Tax Rate, County Tax Rate and City Tax Rate and maybe others too.
Combining all these give you an estimated tax rate which can be categorized per Pincode or ZIPcode but wont be 100% accurate. An Example is here – ZIP Codes: The wrong tool for the job However the article seems like an exaggeration because they want to sell their product/service of course.
Bottom Line- It can get really messy when dealing with Sales Tax in USA. Since I am not the tax guy and have no relation with accountancy whatsoever, there are chances that many of the things I stated above might be wrong. However, I believe that what I read online and the information that I gathered was from trust-able sources. The e-commerce store setup that I did was based on Magento 2, so I managed to create tax rates for each state. Later on, I found out I only needed to create tax rates for only one state i.e., our home state.
Here is a full list of all states combined: USA-allpincodes-mar2019.csv
And you can use following tax rates area wise- in Magento2 format
Reference for CSVs: https://www.avalara.com/taxrates/en/download-tax-tables.html
Reference for other details:
1. https://www.avalara.com/us/en/learn/whitepapers/origin-vs-destination-sales-tax.html
2. https://blog.taxjar.com/states-where-amazon-com-collects-sales-tax/
3. https://en.wikipedia.org/wiki/Sales_taxes_in_the_United_States
4. https://quickbooks.intuit.com/r/taxes/what-is-nexus-and-how-does-it-affect-your-small-business/
