I am trying to figure out the tax laws and when to collect sales tax or not. I am a one man show, that is only located in Houston Texas. I sell 90% to out of state destinations within the US and only US.
If I sell a item for $100 to any state, lets say Alabama for example. Do I charge the customer local sales tax as per the destination of the package is being shipped? I do not have a presence in that state.
Please help me understand.
Thank you for getting in touch with your question! Whether or not you have to charge taxes in a state all depends on whether you have a tax nexus in that state, and a nexus can be either physical or economic. A physical nexus would be having a physical presence in a state, be it through locations (such as an office or warehouse) or through employing employees in the state, for example. An economic nexus is typically defined by having a minimum number of orders or transactions coming from the state in question, and/ or meeting a minimum revenue threshold from customers based in the state.
Each state has their own nexus laws, so you will want to familiarize yourself with the various nexus definitions for each state you plan to sell to. Using your example, it sounds like you only have a physical tax nexus in Texas, meaning you would need to register for a sales tax permit, charge Texan customers sales tax, and remit sales taxes to the state-level tax authorities. TaxJar is a great third-party resource for US sales taxes and you can read their guide for Texas here.
We can also take a look at Alabama, as per your example. Presuming you do not have a physical tax nexus there, you would not need to charge any customers in Alabama sales tax until you meet the economic nexus threshold of $250k p/a, as per the Alabama Department of Revenue. The same rules would apply to other US states you sell to—if you do not have a physical tax nexus in these states, you'll only be required to register for, charge and remit sales taxes when you meet the economic nexus threshold determined on the state level. TaxJar also provided a state-by-state guide on economic nexus laws, which is a handy resource to refer to.
I hope this has helped explain things, but please do let me know if you've any further questions.
Victor | Shopify Social Care