5 Common Sales Tax Misconceptions Explained

When you’re a customer, sales tax is pretty simple. You go to the store, buy something, and pay a small extra percentage on the item. But when you’re a product seller, sales tax gets a little more complex, especially if you sell online.

I hear common sales tax myths and misconceptions from online sellers every day. Today, I want to lay to rest the five most pervasive sales tax myths.

Myth: The IRS will audit me if I don’t collect sales tax correctly.

One phrase I hear all the time is a variation of “I guess I’d better collect sales tax correctly, or I’ll be in trouble with the IRS.” In fact, the IRS has nothing to do with sales tax! The IRS is our national taxing administration, but sales tax is actually governed at the state level. There is no national sales tax in the U.S.

So instead of contending with the IRS, if you have sales tax questions or problems, you need to deal with the state’s taxing authority. This authority is generally called the [State] Department of Revenue, but it can go by other names. California’s taxing authority, for example, is called the California Board of Equalization.

Myth: I only sell online, so I don’t have to collect sales tax.

While this myth is slowly dying, I still hear it from time to time. The truth is, internet sales are just like every other sale. If you sell taxable items and have “sales tax nexus” in a state (more on that concept below), then you are required to collect sales tax from your buyers—no matter if you made the sale face to face or online.

Before you start collecting sales tax, you’re required to register for a sales tax permit with your state’s department of revenue.

Myth: I only have to collect sales tax from buyers in my home state.

This is one of those myths that can be true, but there’s often more to it. Long story short, in the U.S., online sellers are only required to collect sales tax in states where they have sales tax nexus. “Nexus” in this case simply means a significant connection to a state.

You always have nexus in your home state—even if you merely work from your kitchen table—but other common business activities might give you nexus in other states. These activities include having an employee, physical location, salesperson, installer, or contractor in a particular state, or even just storing inventory in a state. You can read more about what each state considers nexus here.

Myth: If I didn’t collect sales tax, I don’t need to file a sales tax return.

This is another myth that can end up costing you money. The truth is that if you hold a sales tax permit in a state, then you should always file a sales tax return on your due date. That’s even if you didn’t collect a penny in sales tax.

States consider your sales tax filing to be a “check in” to let them know you’re still in business. If you don’t file a sales tax return, most states have some form of penalty. The most punitive states might fine you up to $50, while other stays may cancel your sales tax license if you continue not filing.

Myth: I should charge sales tax on everything I sell.

In a perfect world, sales tax would be simple. But in many states, some items considered to be “necessities”—like groceries, clothing, and even textbooks—are either not taxable or taxed at a different rate. For example, groceries are tax free in Kentucky but taxed at a reduced rate of 1% in Illinois. And clothing is tax free in Pennsylvania but taxed at the normal rate in Arkansas. When selling tangible products, be sure that you’re charging the right sales tax rates or you’ll end up with unhappy customers! (If you have questions about what is taxable and what isn’t, you can always contact your state’s department of revenue.)

I hope this post has debunked some of the most common sales tax misconceptions. Do you have questions or something to say? Start the conversation in the comments!

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