If you’re a US merchant, you’re most likely required to pay sales tax according to state and local laws. In this article, we will explain how to set up your store so that you are able to collect, report, and file sales tax properly.
Sales tax applicable to the sale of most products and some services in most states. The rates and rules notably differ from state to state, though. For example, California has the highest state-level sales tax rate at 7.5 percent. The lowest sales tax is in Colorado, which has a rate of 2.9 percent.
In order to know what taxes apply to your business, please use this helpful State Sales Tax Map (click your state on the map).
Set up automatic US tax rates
If you need to charge tax within the United States, then taxes might apply in your city, county, and state. To handle this complexity, you can use automatic tax settings.
When automatic tax rates are enabled:
- Your store automatically calculates tax rates depending on your state tax law, store, and customer location.
- Your store stays up to date on the tax law: once tax laws are changed in your state, county, or even city government, your store will "know" the new rules and apply them at checkout. No actions required on your side.
To enable automatic US sales tax:
- Add your company address in your store admin → Settings → General → Store profile.
- Enable automatic tax calculations in your store admin → Settings → Taxes:
Once the automatic tax rates are enabled, your store will charge a precise tax rate depending on where you and your customers are located.
By default, the same standard tax rate of your store’s region applies to all the products. If some of your products are taxed differently (e.g., they are tax-exempt), you can change the tax rate for them.
If our automatic tax feature doesn’t cover your needs entirely (e.g., you want to charge taxes when selling to other countries), you can set up taxes manually. Find the Manual section in your store admin → Settings → Taxes and click Manage tax rates to be able to add rates manually. Please, refer to this instruction for manual setup to configure your store to calculate tax rates for different regions, zones, and countries.
Handling tax-exempt customers
If you don't want to charge taxes on some of your customers, e.g. non-profit organizations or wholesalers, it also can be done easily. Just mark them as tax-exempt on the Customers page in your store admin. Please, refer to this article for more details: Tax-exempt customers.
Handling non-taxable items
If there are non-taxable products in your store, you can set up a zero tax for them regardless which tax setup you use in your store — automatic or manual. You can also set up reduced or other non-standard tax rates. Please, refer to this article for more details: Product-specific tax rates.
Setting up multi-state nexus
Generally, you only have to collect and report sales taxes in the state where your business resides. But the more precise rule here is that if your company has a physical presence in a state or an economic connection to it, you must collect applicable state and local sales tax from your customers in that state. In legal terms, this connection is known as "nexus". You may have more than one nexus when selling online. Read this article for more details on the matter: https://www.taxjar.com/sales-tax/nexus
Each state defines nexus differently, but all agree that if you have a store or office, a sales tax nexus exists — and you need to charge and report tax there. However, nexus is more than that. Having employees or warehouses in a state may also create a nexus; the same goes for having a certain amount of sales ("economic nexus"). If you are uncertain whether or not your business has a nexus in a certain state, you should contact that state's revenue agency or a tax professional. You can also consult the Economic Nexus State by State Chart by the Sales Tax Institute.
By default, your online store detects your nexus state from your store address and, once you have automatic taxes enabled, it will calculate tax rates accordingly. If you have only one nexus, just enable automatic taxes and it's all set. If your business is distributed over several states, i.e. you have a multi-state sales tax nexus — you can set all your additional nexus addresses so that your customers are charged proper sales tax in all states.
To set additional nexuses for your store:
- From your store admin, go to Taxes.
- In the Tax nexus locations section, click Manage Tax Locations.
- On the opened Tax Nexus Locations page, click + Create Nexus.
- Choose what type of nexus you want to create: physical or economic.
- For a physical nexus, enter location address information.
- For an economic nexus, choose a state, enter any corresponding zip code for it and schedule when this nexus should start being applied to orders in your store.
- Click Create & Start Tax Collection.
- (optional) Create more nexuses on the Tax Nexus Locations page if you need.
That’s it! Now you have a multi-state nexus set up, and your store will automatically calculate tax rates according to all your nexus states. You can always view, edit, or delete your tax nexuses by going to Taxes → Manage Tax Locations.
FAQ
I set up automatic tax rates but taxes won’t apply.
If you’ve set up automatic taxes and get orders with zero taxes charged, check the addresses of the customers who placed those orders. You must collect sales tax only from buyers from your state or from states where you have nexus. So, if a customer is not from your state, it’s absolutely fine that they are not charged any tax.
In simple words, you must charge applicable taxes only from customers who come from the same state as your company. For instance, your company is located in Texas. When a customer from Texas places an order in your store, they are charged a tax. If a customer is from New York or any other state, i.e. not from Texas, they won’t be charged any tax. Learn more about Sales Tax Nexus in the TaxJar blog.
If you have nexus in several states, set up multi-state nexus to charge taxes correctly.
How to apply different tax rates to different types of products?
Different types of products can be taxed at different rates. For example, if you sell alcohol and food in your store, you will most likely need to charge different tax rates. The same goes for non-taxable items. You can set up the tax rates you need in your online store. See the instructions in the article: Product-specific tax rates.
How can I charge the Colorado Retail Delivery Fee in my store?
If you’re a Colorado merchant and you ship/deliver to buyers in your state, then you must comply with the new rules that come into force on July 1, 2022. You are liable to collect and remit the retail delivery fee, that is $0.27 per sale. This fee is applied if at least one item in the order is subject to state sales or use tax.
Currently, the retail delivery fee is not included in your store’s automatic taxes. You can charge it to your customers by adding a handling fee.
To set up the fee:
- From your store admin, go to Shipping & Pickup.
- Scroll down and click Set Up Handling Fee.
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Fill out the Title and Amount fields, and add a description if you like:
- Click Submit.
That’s it! Now customers will be charged the retail delivery fee at checkout when placing an order. The fee will be displayed in their order confirmation emails and in invoices.
We do not recommend using this workaround if:
- You also have order pickup or curbside pickup in your store.
Reason: The handling fee is applied to all the orders that require shipping or pickup, irrespective of the delivery method your customers choose. - You have product-specific free delivery set up in your store.
Reason: In case free delivery is specified for all the items in the order, the fee will not be applied.