Introduction
The sales tax system in the U.S. is anything but simple. The United States does not have a nationwide Sales tax; each state sets its own sales tax rules.
Out of the 50 states in the U.S., 45 levy sales tax. However, five states have no sales tax. These states are known as NOMAD states, which stand for New Hampshire, Oregon, Montana, Alaska, and Delaware.
Sales tax in the U.S. can be complicated since each of the 45 states has different tax rates and rules that can vary by location. This complexity can create challenges for foreign sellers in the U.S. market and for foreign customers shopping in the U.S. For instance, California requires foreign buyers outside the U.S. to pay sales or use tax only when they physically receive goods in California. If these customers take possession of the same items outside the U.S., they may be exempt from sales tax. Both buyers and sellers need to understand these distinctions to navigate sales tax requirements properly.
This article explains how the U.S. sales tax works and helps you demystify it.
First, let’s understand what a sales tax is and how it is calculated.
What is a Sales tax, and how is it calculated?
Sales tax is a type of consumption tax that is usually applied to the sale of goods and services. The rate of sales tax varies by state and is calculated based on the final sales price.
For instance, if the final price of an item is $100 and the sales tax rate is 10%, the sales tax would amount to $10 (which is $100 x 10%). Consequently, the total price, including tax, would be $110 (which is $100 + $10).
Next, let’s understand when sales tax gets triggered.
When does Sales tax get triggered?
In the United States, sales tax is typically applied at the point of sale when goods or services are purchased. However, this can vary based on the tax regulations of each state and the specific items that are taxable.
Therefore, sales tax is generally triggered at the point of sale.
Next, let’s understand who is generally responsible for sales tax in the United States.
Who is Responsible for Sales Tax?
Different states impose various types of sales taxes, leading to different responsibilities for payment. States can either follow a Seller Privilege Tax system or a Consumer Tax system, which determines who is primarily responsible for paying the tax. These are as follows:
Seller Privilege Tax States
In states that implement a Seller Privilege Tax, the seller is primarily responsible for paying the tax. This means the seller must pay the tax regardless of whether it is collected from the purchaser. The tax is typically imposed on the privilege of conducting business within the state. Examples of states with this system include California and Arizona.
Consumer Tax States
In contrast, most states impose a consumer sales tax on buyers. States such as New York and Alabama are categorized as Consumer Tax states.
In summary, sales tax mostly applies to sales made to the end-user or ultimate consumer.
Next, let’s understand who is generally responsible for collecting sales tax in the United States.
Who is responsible for collecting Sales tax?
The ultimate responsibility for collecting sales tax lies with the seller. However, in seller privilege states, if an audit occurs, the state cannot pursue the consumer for any unpaid sales tax; they can only hold the seller accountable. In consumer use states, tax officials have the authority to hold either the buyer, the seller, or both responsible for any unpaid tax.
Next, let’s understand when the seller is generally responsible for collecting sales tax in the United States.
When does the seller become responsible for collecting sales tax?
A Seller is responsible for collecting sales tax where he/ she has “Nexus” in that U.S. State when selling to the final user or consumer.
Sales tax nexus refers to the relationship between a seller and a state that mandates businesses to collect and remit taxes on sales made within that state. Many U.S. states have specific nexus requirements that determine when a seller is obligated to collect sales tax.
Nexus can be created in the following ways:
- Physical Nexus
- Economic Nexus
First, let’s understand the physical nexus requirement in the next section.
Physical Nexus Requirement:
Traditionally, states impose sales tax on the purchase of goods and services when the seller has a physical presence in that state, which is known as a “nexus.” This nexus can be established through various means, such as opening a store or office, or hiring employees in the state.
A seller may be considered to have a physical presence in a state due to the following factors (note that these may vary by state):
- Owning or leasing real property in the state (e.g., retail stores, warehouses, factories, offices, manufacturing facilities, etc.)
- Owning or leasing tangible personal property in the state (e.g., machinery, equipment, products, etc.)
- Maintaining inventory in the state (for most states, this could include goods owned and fulfilment by Amazon merchants stored in Amazon-operated warehouses)
- Having employees or independent representatives in the state, including remote employees
- Attending trade shows in the state
- Providing services in the state
- Delivering merchandise in the state
These factors help determine whether a seller is required to collect sales tax in a specific state.
For example, a foreign company based out of Canada manufactures and sells various electronic goods such as laptops, smartphones, and tablets. The company has its subsidiary office and several retail stores in New York. Because the company has a physical presence in California through its stores and office, it has a sales tax nexus in New York. This means that the company must collect and remit sales tax on the sales made to its customers in New York.
Let’s take another example. When your company participates in a trade show in a particular state, it may create a physical nexus in that state, which can create new sales tax obligations for your company. Participating in just one trade show per year in some states is enough to give an out-of-state company a sales tax obligation.
Depending on the state, the physical nexus requirement can be complex and lead to multiple tax obligations. In some states, experts humorously suggest that simply inhaling their air could establish a nexus, while in another state, just exhaling might create one. Therefore, it is essential to carefully evaluate the nexus requirements.
Next, let’s understand the economic nexus requirement in the next section.
Economic Nexus Requirement:
If your business is based outside the U.S. and you sell products or services in the U.S. without any physical presence, you might assume that you do not have to collect or remit sales tax. However, many states establish a sales tax obligation even in the absence of a physical presence within the state.
This requirement arises from “economic nexus,” which mandates tax collection based on the amount of sales or revenue generated in a state, instead of on physical presence. TheU.S. Supreme Court’s Wayfair decision in 2018 established this economic nexus standard. Now, every state with a sales tax has economic nexus requirements following the 2018 South Dakota v. Wayfair decision.
The concept has become more relevant with the growth of e-commerce and online sales, as businesses can have a significant economic impact on a state without a physical presence. Meeting economic nexus status usually occurs after you’ve passed a specific transaction or revenue threshold.
In most states, these thresholds are based on the past 12 months of activity, with requirements and deadlines for registering with the state to pay tax that also vary. For instance, California imposes sales tax obligations on retailers with over $500,000 in sales in their state, even without a physical presence.
Hence, Foreign companies that have activity within the U.S. ‒ whether in the form of physical presence or economic presence ‒ should closely review the implications of the U.S. sales tax system.
Sales Tax Complexities during Cross-border Transactions
Due to differences in sales tax rules between states, a foreign business may have sales tax consequences in more than one state. Let’s understand the different scenarios that might create sales tax complexity for foreign businesses:
Foreign Company Selling Products or Services in the U.S.
Many foreign companies sell products in the U.S. They often utilize multiple sales channels, including direct-to-consumer websites, online marketplaces like Amazon and eBay, brick-and-mortar stores, and wholesale distribution channels. However, each of these sales channels may have different sales tax implications.
In the next section, we will discuss the various sales tax obligations that international companies face as they navigate complex requirements that vary by state and locality.
Selling Products directly to consumers without a physical presence
There may be situations in which a foreign company sells and ships products directly to U.S. consumers without having any physical presence in the United States. To avoid establishing such a presence, these companies typically adhere to the following guidelines:
- They have no physical presence in any U.S. state.
- They have never travelled to the U.S. for any purpose, such as trade shows or client meetings.
- They do not hire independent contractors in the U.S.
- They do not employ salespeople who act as dependent agents.
- They do not sell through marketplace sellers like Amazon or eBay.
So even if the foreign company avoids any possibility of physical nexus, they may be caught under the economic nexus requirements, depending on the state where they operate. For example, many states like California, Arizona, Massachusetts, Texas, Michigan, and Washington, D.C. require foreign remote sellers to register and collect and remit sales tax if the remote seller qualifies the thresholds for economic nexus in their state.
Example:
Let’s assume a foreign company in Canada is selling high-end headphones and ships products directly to U.S. customers based in California. They do not have any physical presence in California. However, their sales meet the economic nexus threshold. The following could be their sales tax impact:
Economic Nexus: The economic nexus refers to the situation where a company’s sales exceed a specific threshold or a particular number of transactions. In this instance, the company surpassed that threshold. Although it does not have a physical presence in the state, it still meets the economic nexus criteria. As a result, the company has established an economic nexus with California, which triggers its sales tax obligations.
Tracking Sales: The Canadian retailer must track sales by state to identify when sales thresholds are met. For example, California has set the economic nexus threshold at $500,000 in sales within a calendar year.
Registration and Collection: Once the nexus threshold is reached in California, where the threshold includes $500,000 in sales, the retailer must register with that state’s tax authority. After registration, the retailer must collect sales tax from customers based on their local tax rates, which vary across states and local jurisdictions.
Remittance: The retailer is responsible for remitting the collected taxes to the respective state’s tax authority according to prescribed schedules, which could be monthly, quarterly, or annually.
Customs and Import Duties: Separate from sales tax, import duties might be applicable and are usually handled by customs brokers or paid by the customers upon import.
Foreign companies, like the Canadian company in this scenario, need to invest in robust systems or services for sales tax calculation, collection, and remittance to ensure compliance across multiple U.S. states. Failure to comply with these tax obligations can lead to penalties and interest charges.
Selling products via a Drop shipper in the US
Drop shipping is a retail fulfilment method where a seller does not keep products in stock but instead sends customer orders and shipment details to a third party. This third party acting as a drop shipper (usually a manufacturer or distributor) then ships the goods directly to the customer.
Drop shipping business model delivers significant benefits to foreign sellers in lowering their inventory and supply chain costs while driving increased sales.
In this business model, the sales transaction involves two distinct parts:
- The sale from the foreign seller to the U.S. consumer.
- The sale from the U.S.-based drop shipper, who is usually a manufacturer or a distributor to the foreign seller
These transactions, while related, are treated separately for sales tax purposes and can be quite complex, especially when the seller is foreign and the transactions cross international borders.
Example:
- Foreign Seller: A foreign retail company based in Germany that sells designer handbags online. They have no physical presence or physical nexus in any state in the U.S.
- U.S. Customer: A customer in California decides to purchase a $150,000 designer handbag from the German company’s online store.
- U.S. Vendor: The handbags are shipped from a vendor based in New Jersey.
Next, let’s understand the U.S. Sales tax implications for the above example.
U.S. Sales Tax Implications:
- First Transaction (Seller to Consumer)
As the German company approaches sales of $150,000 to customers in California, they must monitor closely because surpassing $500,000 in sales would require them to collect California sales tax due to economic nexus laws.
Assuming they exceeded this threshold, the company need to collect California sales tax.
- Second Transaction (Seller to Drop shipper)
To fulfil the order, the German company buys the handbag from the New Jersey vendor remotely and asks them to ship it directly to the California customer.
The New Jersey based vendor’s sale to the German seller is usually an exempt wholesale transaction. This is because the foreign seller is purchasing the goods to resell them. This applies even if the vendor has a connection (nexus) and is required to collect sales tax in the seller’s state. However, if the goods being sold are subject to sales tax in that state, the vendor must validate the tax-exempt transaction by obtaining a resale or exemption certificate from the foreign seller.
So, in our example the German company provides the New Jersey vendor with a resale certificate acceptable in California. It is essential to have a valid resale exemption certificate. Without it, a transaction may be classified as a retail sale instead of a wholesale sale. In this case, the state could legally require the supplier to collect sales tax from the customer, who is the foreign seller.
Resale exemption certificate procedures differ from state to state. Many states will accept an out-of-state resale certificate, multijurisdictional form (i.e., the Multistate Tax Commission uniform sales and use tax resale certificate or Streamlined Certificate of Exemption), or alternate documentation in a drop-shipping situation.
However, in California and other states with stricter requirements for resale certificates, sellers must register with the state to obtain a valid exemption certificate. Once registered, sellers are required to collect sales taxes from customers in that state, even if they do not have any other business presence there.
So, it is presumed that the German seller is registered for sales tax purposes in California before they can obtain resale certificate.
Properly documented, the transaction is treated as a sale for resale, exempt from sales tax in both New Jersey and California.
All the above transactions must be supported by proper documentation, like resale certificates acceptable in the state of the customer, is critical to avoiding unnecessary sales tax charges.
Also, the foreign seller should continually assess their sales activities in each U.S. state. Reaching sales or transaction thresholds could establish economic nexus, necessitating registration and collection of sales tax.
Selling through a Marketplace
Marketplaces are businesses that bring together multiple vendors under one roof — or website.
Suppose a foreign company intends to sell physical products to the U.S., utilizing Amazon’s marketplace for distribution. The company utilizes Amazon’s fulfilment centres for warehousing and sells products to end consumers in Washington, D.C.
Using Amazon, which acts as a marketplace facilitator, can streamline the process of sales tax collection.
Many States enforce Marketplace Facilitator laws that require platforms like Amazon to handle the collection and remittance of sales tax on sales made by third-party sellers. This means the company is relieved from the responsibility of collecting sales tax directly from customers. However, it remains essential for the company to monitor where its products are sold and to ensure Amazon is complying with all applicable local tax laws.
Additionally, the company’s engagement with Amazon’s Fulfilment by Amazon (FBA) program can further complicate tax compliance. This program may lead to the company’s inventory being housed in multiple fulfilment centres across various states. The presence of inventory in these states can establish a sales tax nexus, obligating the company to adhere to each state’s sales tax laws.
For instance, the California Department of Tax and Fee Administration (CDTFA) states that if you have inventory stored in a third-party fulfillment center in California, you are considered to be engaged in business in the state due to your physical presence here (inventory).
Therefore, it’s vital for the company to keep track of the locations of its inventory and to be well-informed about the tax obligations in those states.
Sales tax implications on storing products in Foreign Trade Zones
Foreign Trade Zones are specific areas located within the United States where goods can be stored, processed, and manipulated without being subject to immediate customs duties. These zones facilitate and encourage international commerce by deferring these duties until goods exit the zone. Merchandise within an FTZ may be exported, destroyed, or moved into U.S. commerce under specific regulatory conditions, impacting how state and local taxes apply.
Such products may be subject to sales tax, depending on the laws of the State where they are being stored. For example, mere storage of products in Free trade zone does not create any sales tax nexus in California
Example:
Widget Co., a German electronics manufacturer. Widget Co. sends electronics to the U.S., storing them in a Foreign Trade Zone (FTZ) at the Port of Long Beach, California.
Nexus and Taxation in an FTZ
- FTZ Benefits: While Widget Co.’s electronics are in the FTZ, they aren’t subject to U.S. customs laws. This allows for storage, assembly, or processing without incurring customs duties immediately.
Sales Tax Implications:
- Sales Inside California: Sales made from the FTZ to customers in California are subject to California sales tax. The presence of inventory in the state, even within an FTZ, constitutes a physical nexus.
- Sales Outside California: Sales shipped to customers outside California from the FTZ are not subject to California sales tax, aligning with rules for interstate and foreign commerce. This tax exemption works the same way whether the retailer ships the goods directly or uses carriers, brokers, or forwarding agents.
From the above discussion, it means products that pass through a Foreign Trade Zone (FTZ) and are sold to customers in California are subject to California sales tax. However, if these products are shipped to customers outside of California, no California sales tax applies.
Widget Co. must register for a sales tax permit in California and collect sales tax on transactions with California customers. Operating within an FTZ offers benefits like deferring customs duties and potentially mitigating some tax exposures, but it does not exempt Widget Co. from state sales tax obligations when selling to in-state customers. This situation highlights the need to comprehend both the strategic benefits of FTZs and the associated local tax implications.
Foreign Company Providing Services to the United States
When it comes to the taxation of services performed by a foreign company in the U.S., it’s crucial to understand the complexity and variability of state sales tax laws as they apply to services. Here’s how you might approach understanding and complying with these regulations:
Determine the Nature of the Service
First, identify which of the six categories your service falls into, as these are primarily taxed by majority of states:
- Services to tangible personal property
- Services to real property
- Business services
- Personal services
- Professional services
- Amusement/recreation
The category of the service will significantly influence the taxability in different states.
Check State-specific Regulations
Each state has its own rules about what types of services are taxable. For a foreign company, it’s important to check the regulations in each state where the services are being provided. For instance, Taxable services in Connecticut include some services to tangible personal property, business services, services to real property, personal services, and amusement/recreation services.
Example 1: Physical Services
For example, a Canadian company send its employees for repairing electronics in Florida. The services are provided across various locations in Florida.
In Florida, services that involve repairing, altering, or improving tangible personal property are subject to sales tax. This includes electronic repair services.
Also, Florida establishes economic nexus based on a sales threshold of more than $100,000 in sales of tangible personal property, which includes taxable services, into the state during the previous calendar year.
If the Canadian company meets the nexus threshold, it must register with the Florida Department of Revenue.
Example 2: Remote Services
Depending on state laws even remote services provided by foreign companies may be subject to sales tax.
Consider a foreign software company selling SaaS products in Vermont. This company must understand the specific tax statutes of Vermont as they pertain to digital goods. If Vermont considers SaaS as a taxable service, the company needs to collect sales tax from its customers in Vermont and remit those taxes to the state. Additionally, if the software company sells physical goods like software CDs, those are also taxable under Vermont law.
Sales tax on Digital Products or Services:
Foreign companies frequently offer digital solutions to U.S. consumers, allowing these companies to expand their global market reach. These could be either in the form of digital goods or services.
Digital products and services are intangible goods delivered electronically, such as eBooks, streaming services, online courses, and downloadable software. These digital goods are classified under state laws based on their nature, purpose, and delivery method, making their taxability a key area of concern for businesses.
Non-uniform Sales tax rules on Digital products
Not all digital products are taxed uniformly across jurisdictions, which makes understanding their definitions crucial for businesses conducting online sales. Many states treat these products as equivalent to tangible personal property, requiring the collection of digital product sales tax in applicable jurisdictions. However, certain states offer exemptions for educational digital books or non-commercial use, further complicating compliance requirements.
For instance, Washington categorizes all digital goods as taxable, as outlined in their state guidelines, while states like Florida exempt educational materials such as digital books. These disparities create significant challenges for businesses managing sales tax compliance across multiple states.
Sourcing of digital goods or services
States use different sourcing rules to determine the taxability of digital products or services, based on the buyer’s location, the sellers, or the server hosting the digital product or service. Another approach some states adopt is taxing certain digital goods, while others may be exempt or apply a reduced tax rate.
For instance, if servers are located in New York, the state may impose sales tax based on the server location as the point of sale. Meanwhile, a sales team in New Jersey could have tax implications, as New Jersey might claim a share of the business income. In Washington, where digital goods are downloaded, the state could apply its own sales tax rules based on the download location. Finally, in Florida, where the products are used, additional tax could be levied if Florida laws tax digital usage within the state. This scenario underscores the complexity as each state may have different nexus rules –where transactions are considered to occur—and different taxability rules for digital products, necessitating robust systems or professional guidance to ensure compliance and manage tax liability effectively.
Economic Nexus and Digital Product Sales Tax
The concept of economic nexus has fundamentally changed how businesses handle sales tax for digital products. Unlike the traditional requirement of a tangible personal property presence, economic nexus rules mandate that businesses collecting a certain level of revenue or completing a specific number of transactions in a state must collect and remit digital product sales tax.
For example, many states set thresholds at $100,000 in revenue or 200 transactions, meaning businesses must register for sales tax compliance even if they lack a physical presence in the state. These rules have expanded tax obligations for e-commerce sellers offering digital goods like software or streaming services. Foreign companies should register for Sales Tax with state and local tax agencies when the relevant nexus thresholds are exceeded.
Economic nexus rules introduce new challenges for businesses selling digital products in monitoring sales tax compliance obligations across multiple states. Each state applies its own thresholds, rates, and exemptions, requiring businesses to maintain accurate records of transactions and revenue. For example, Washington requires businesses exceeding its economic nexus thresholds to collect taxes on all digital goods, including digital books and downloadable software, as specified in its state guidelines.
Hence, it is important to understand how state-specific nexus laws can help businesses proactively manage their tax liabilities.
By understanding these scenarios, foreign businesses can navigate U.S. sales tax complexities effectively and remain compliant. Hence, it is important to understand how state-specific nexus laws can help businesses proactively manage their tax liabilities.
What is a Use tax?
Use tax is a tax imposed on the use, storage, or consumption of goods and services purchased without paying sales tax. This tax is typically levied by the state or local government where the goods or services are utilized, and the rate is usually the same as the sales tax rate. The purpose of use tax is to ensure that individuals who buy goods and services from out-of-state vendors or online retailers pay the same amount of tax as they would if they had purchased those items locally.
Example:
Suppose you live in a state where the sales tax rate is 7%. You decide to buy a laptop from an online retailer that does not have a physical presence in your state and does not charge you the 7% sales tax at the time of purchase.
Since you bought the laptop without paying the local sales tax, you are responsible for paying the 7% use tax to your state. This ensures that you pay the same total tax as you would have if you purchased the laptop from a local store, where sales tax is automatically applied at the point of sale.
What is a Use tax?
Use tax is a tax imposed on the use, storage, or consumption of goods and services purchased without paying sales tax. This tax is typically levied by the state or local government where the goods or services are utilized, and the rate is usually the same as the sales tax rate. The purpose of use tax is to ensure that individuals who buy goods and services from out-of-state vendors or online retailers pay the same amount of tax as they would if they had purchased those items locally.
Example:
Suppose you live in a state where the sales tax rate is 7%. You decide to buy a laptop from an online retailer that does not have a physical presence in your state and does not charge you the 7% sales tax at the time of purchase.
Since you bought the laptop without paying the local sales tax, you are responsible for paying the 7% use tax to your state. This ensures that you pay the same total tax as you would have if you purchased the laptop from a local store, where sales tax is automatically applied at the point of sale.
Sales and Use tax in New Jersey
New Jersey, famous for its stunning beaches and beautiful gardens, is a business hotspot. However, understanding the complexities of New Jersey sales tax can be challenging.
This guide provides a clear overview of everything you need to understand about sales tax in New Jersey. It covers how to determine the appropriate sales tax rates, explains exemptions, and outlines the filing processes. By the end of this comprehensive guide, you will feel confident and well-prepared to manage New Jersey sales tax effectively.
Is New Jersey a Destination or Origin Sales Tax State?
New Jersey operates as a destination sales tax state,. This means that the sales tax rates are determined by the location where the buyer receives the goods or services, rather than where the seller is located. When selling to customers in New Jersey, you are required to collect sales tax based on the rate applicable to the customer’s location, which includes any local sales taxes.
The sales tax rate in New Jersey is 6.625%.
Determining Sales Tax Nexus in New Jersey
When a business establishes either a physical or economic nexus, it is required to collect sales tax in New Jersey.
Physical nexus is determined by the company’s activities or physical presence within the state. Additionally, reaching a sales or transaction threshold can create economic nexus obligations, requiring the business to collect and remit sales tax in New Jersey.
Economic Nexus
Economic nexus occurs when a business hits specific sales or transaction thresholds in New Jersey, regardless of having a physical presence.As of 2025, a remote seller establishes economic nexus with New Jersey if, in the current or prior calendar year, it:
- It has generated more than $100,000 in gross revenue from sales of tangible personal property, specified digital products, or taxable services delivered into New Jersey; or
- It has completed 200 or more separate transactions involving tangible personal property, specified digital products, or taxable services delivered into New Jersey.
When specified digital products are taxed in New Jersey?
Specified digital products are subject to Sales Tax when the property is electronically delivered to the customer at an address in New Jersey. If the property is not received by the purchaser at the seller’s New Jersey business location or at the purchaser’s New Jersey location, the sale is subject to New Jersey Sales Tax if either the seller’s business records or the address provided by the purchaser during the sale indicate a New Jersey billing address. For example, if a New Jersey resident traveling in another state downloads music to a hand-held electronic device, the sale of the specified digital product is subject to New Jersey Sales Tax because the customer’s billing address is in New Jersey.
Physical Nexus
New Jerseyan retailers who meet these requirements are required to collect state sales tax in New Jersey:
- Physical Location: If you have a warehouse, office, or distribution center located in New Jersey, you’ll have to get a seller’s permit.
- Employee Location: Employees, independent contractors, agents, or other representatives operating on your behalf.
- Affiliate Nexus:
Affiliate nexus arises when a business has a relationship with another entity in New Jersey that aids in promoting or facilitating the sale of its products or services. Examples of affiliate nexus relationships include:
- A parent company, subsidiary, or sister company that has a presence in the state.
- A business that utilizes a New Jersey-based affiliate to advertise, promote, or facilitate sales.
- Trade Shows: Sellers participating in seasonal or temporary trade shows must register for sales tax if they sell taxable goods and services.
- Tangible Personal Property: Selling, leasing, or renting tangible personal property is subject to sales tax. This applies to situations where you store your products within the state, even if this is done through a third-party fulfillment center or 3PL, such as Amazon FBA, or an online marketplace.
Do I Have to Collect Sales Tax from New Jersey Customers if I Sell on Amazon, Walmart, Ebay, or Etsy?
New Jersey has a law requiring online marketplaces to collect sales tax for third-party sellers.
Like in many states, sales made via marketplaces still count toward your New Jersey economic nexus threshold.
Marketplace facilitators are accountable for collecting and remitting sales tax on behalf of the sellers using their platform. If you’re over the economic nexus threshold in New Jersey and only sell to New Jersey buyers via marketplaces, then you need to register for a New Jersey sales tax permit. You can request a non-reporting status to avoid filing New Jersey sales tax returns.
What’s taxable and exempt in New Jersey?
Let’s start with a list of taxable products and services in New Jersey.
- Tangible Products: Physical items are generally taxable.
- Digital Products: Goods delivered or accessed electronically, like media streaming services and eBooks.
- Specific Services: Some services, such as maintenance and repair, are taxable.
- Transient Accommodations: Short-term rentals like vacation rentals and rooms.
- Shipping Charges: If the item that you’re shipping is taxable, then shipping charges are also taxable.
Exemptions from sales tax in New Jersey
- Most Food and Drink: Items bought in a food store for human consumption are generally exempt.
- Clothing: Most articles of clothing are exempt from sales tax.
- Prescription Drugs: Both prescription and many over-the-counter drugs are exempt.
- Educational Services: Tuition fees for educational institutions are generally exempt.
- Certain Agricultural Supplies: Farm machinery and livestock feed are exempt.
- Resale Items: Items purchased for resale are exempt when a valid resale certificate is provided.
When Are Sales Taxes Due in New Jersey?
Sales tax return deadlines depend on the state’s regulations and the vendor’s filing frequency. If a seller exceeds the economic threshold, they are required to file returns on a monthly basis. Conversely, if the seller does not exceed the threshold, returns may be filed quarterly or annually.
Sales tax returns must be filed by the 20th of the month following the reporting period. New Jersey requires an extra business day to process payments and as a result, the “payment” is due a day earlier than the filing date.
What will happen if you collect the sales tax and purposely do not remit it to the state of New Jersey?
In New Jersey, anyone who collects Sales Tax from customers does so as a trustee on behalf of the State. All tax collected, including amounts in excess of the required tax (calculated by multiplying the amount of the taxable receipts by the Sales Tax rate), must be periodically remitted to the State with the appropriate Sales and Use Tax return. Under the law, business owners, partners, corporate officers, and some employees may be personally liable to the State for failure to collect Sales Tax when required or to file a return and remit any tax when due. Penalties and interest are imposed for such violations.
Penalties, Interest, and Collection Fees
When a quarterly return or monthly remittance statement is filed after its due date, or if tax is paid late, penalties and interest will be applied as follows:
Late Filing Penalty: A late filing penalty of 5% per month (or part of a month) will be assessed on the balance of the tax liability due as of the original return due date, up to a maximum of 25% of that tax liability. Additionally, a penalty of $100 per month (or part of a month) will be imposed for each month the return is late.
Late Payment Penalty: A late payment penalty of 5% of the outstanding tax balance may also be applied.
Interest: An interest rate of 3% above the prime rate will be charged for every month (or part of a month) that the tax remains unpaid, compounded annually. At the end of each calendar year, any outstanding tax, penalties, and interest will be added to the balance on which interest is calculated.
Collection Fees: If your tax bill is sent to a collection agency, an additional referral cost recovery fee of 10.7% of the tax due will be added to your liability. Furthermore, if a certificate of debt is issued for your unpaid liability, additional collection fees may also be imposed.
Criminal Penalties: Criminal penalties for sales tax are some of the most severe tax penalties that exist. Essentially, if you knew you owed sales tax and you didn’t pay it, then criminal liabilities could apply.
- New Jersey’s categories that are used for grading criminal offenses are distinct from those of most jurisdictions. For example, the majority of states grade offenses as either felonies or misdemeanours and then have several levels further contained within each. The most serious crimes are charged as first-degree offenses in New Jersey. The least serious category is a disorderly person offense–those that are unlikely to result in a jail sentence.
- In New Jersey, failing to pay sales tax is categorized as a disorderly persons offense if the failure occurs due to recklessness or negligence (N.J.S.A. 54:52-9).
- If the failure to pay sales tax is done with the intent to evade, it is considered a third-degree crime. A third-degree crime in New Jersey is classified as a felony and can result in a jail sentence of up to five years, along with a fine of up to $15,000.
- If an individual fails to remit $75,000 or more in collected tax, this is classified as a second-degree crime. A second-degree crime in New Jersey carries a penalty of 5-10 years in prison and fines of up to $150,000.
Can a foreign visitor to New Jersey receive a refund for sales tax paid before returning to their country?
In general, a refund of sales tax is not available if you take possession of an item directly from a vendor within a given state. In the United States, sales tax is applied at the point when the title or possession of the item is transferred. Therefore, if a foreign visitor to the United States purchases taxable items and takes possession of them at the retailer’s location, the sales tax is owed, and there is typically no refund of the sales tax simply because the goods will be taken out of the United States.
Conversely, if the retailer ships the goods directly to the non-resident’s location in another country, sales tax is generally not owed. However, in this case, the retailer must handle the export of the goods, and the customer cannot take possession of the items within the United States.
So, if a foreigner purchased goods shipped directly to their home country, then the tax would not have applied to the transaction. This is because they would not have taken possession and control in New Jersey.
Disclaimer: The information provided in this article is for general informational purposes only and does not include legal advice. This article does not comprise an attorney-client relationship between the reader and Arora Law P.C. or its attorneys. If you have specific questions regarding your individual situation, please consult with a licensed attorney.
The information in this article is current as of the publication date. U.S. Tax laws and regulations change frequently, and readers should confirm whether any updates have occurred since.