Why do you charge sales tax on trophies?
“I’ve ordered trophies from you for years. You never charged sales tax before. But this year you charged sales tax on my order. Why?” I’ve heard this several times from customers around the country. Here is an explanation of what changed and why we charge sales tax on some orders.
Sales tax is a regulated on a state by state basis. Some states charge sales tax, but some don’t . If a state has a sales tax, some of it’s municipalities (cities, townships, counties, etc.) may also have a sales tax. These laws vary state by state and can be very complicated. But essentially, a sales tax is imposed on the residents of a state when they make a purchase in that state. So if your state has a sales tax, when you go to a retail store and make a purchase, the retailer is required by law to charge you the sales tax and remit that tax to the state collection agency. The store does not pay the sales tax, you pay the sales tax. The state forces the retailer to collect and remit the sales tax because it is physically located in the state (it has a nexus) and thus can be regulated by the state.
If you purchased something from a retailer in another state that had no physical presence (or nexus) in your state, by federal law your state could not force them to collect sales tax, so they did not have to charge you sales tax. You as a resident, were still obligated to pay the sales tax to your state, typically by reporting it on your state tax forms. It is probably no surprise that many people did not report these out of state purchases and so the state missed collecting the sales tax on out of state purchases.
This changed in the summer of 2018, when the US Supreme Court decided in a case (South Dakota vs. Wayfair) that a state could force retailers from outside the state to collect sales tax on it’s residents if it had an “economic nexus” within the state. This was defined by South Dakota as having sales within the state in excess of $100,000 or 200 transactions. This economic nexus rule was quickly adopted by other states across the nation. Some states defined their nexus the same as that in South Dakota, while some raised their minimum sales amounts. As of today, 41 states have defined economic nexus levels of some kind within their state.
It is up to us, as an out of state retailer to review your state’s tax laws, and if we meet their economic nexus definition, we have to register for a tax license in your state. Once your state issues us a tax license, we must collect a sales tax from you on your order of trophies and then send that sales tax to your state. Your state has the right to audit us and if we are not in compliance with your state’s sales tax laws, we could be fined accordingly.
So if we charge a sales tax on your trophies, it’s not that we want to – it’s because we have to based on the tax laws within your state.