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The Tax Code is one of the most complex parts of any business and knowing how this works in each state is vital, especially for gig workers looking to maximize their opportunities and use the gig economy as an income bridge to what would be a long term goal, not the goal.
So in this article, We are talking about:
EVERYTHING You MUST Know about Sales Tax for Gig Workers
What they tell you vs how it ACTUALLY is
Everything in between!
Disclaimer: The content of this article does not contain and is never intended to be legal, business, financial, tax, or health advice of any kind, This article is for entertainment purposes only. It is advised that you conduct your own research and consult with qualified professionals before applying anything you find online.
I also want to be clear that everything we are going over is very market dependent, and what applies to me and my market may not apply to you.
Thank you to GigTax for Verifying this information and making this article possible!
What is Sales Tax?
Sales tax is a tax imposed on the sale of goods and services. It is typically a percentage of the purchase price and is added to the final cost of the product or service. The rate of sales tax varies by location, with different states and localities having their own rates.
In the United States, it is not a federal tax, but rather a state and local tax. Sales tax revenue is used to fund various government programs and services such as education, transportation, and healthcare. Hence why this is such a market to market topic.
Also, it’s a form of indirect tax, meaning that it is a tax that can be shifted to others. This is also why some people set up a virtual office in states that don’t have sales tax but more on that later.
Sales tax refers to when it’s added to the sales price of a good or service and is then charged by the retailer to the end consumer. The retailer then remits the retail sale’s collected tax to the government. Tax jurisdictions only receive tax revenue when a sale is made to the end consumer.
However, when buying supplies or materials that will be resold, businesses can issue resale certificates to sellers and are not liable for sales tax.
State by State Rules
As noted earlier, sales tax can be an important source of revenue for governments at the state and local levels. This is a point where it can get confusing for businesses as local sales tax varies by state, and why this subject is such a market to market topic.
In fact, there are four states — Delaware, Montana, New Hampshire, and Oregon — that do not levy a general state sales tax.
Alaska used to be part of this list but now has a 1.82% sales tax, still low but I am sure they had an uproar about it.
For the majority of states that do apply sales tax, the sales tax rate can vary within state lines, and sometimes even outside of state lines if they have a virtual office and do most of their sales online.
There are 38 states that allow local governments to impose their own general sales taxes, in addition to the state general sales tax.
Let’s use California as an example. In Annapolis in Sonoma County the tax rate is 8.5 percent. Meanwhile, Antelope in Sacramento County applies a tax rate of 7.75 percent. In Ashland, which is in Alameda County, the tax rate jumps up to 10.25 percent.
Note that items that are considered “essentials,” such as groceries or utilities, have a lower or no tax rate as a way to provide low-income tax relief.
Examples of items and goods that are commonly subject to sales tax include, but are not limited to:
Furniture
Restaurant food and drink
Cosmetics and toiletries
Computers
Giftware
Toys
Antiques
Clothing
Construction services
Metered parking
Hair cuts
Dry cleaning
Origin vs State
One of the key areas to know when it comes to sales tax is “sourcing,” which means the location where a sale is taxed. Origin-sourced sales are taxed where the seller is located, while destination-sourced sales are taxed at the location where the buyer takes possession of the item sold.
Whether you are selling services in person or products online, it is important to know whether you are located in an origin-sourced state or a destination-sourced state. Most states and Washington, D.C., are destination-based. There are 12 origin-based states.
Arizona
California (considered a "mixed sourcing state" as city, county and state sales taxes are origin-based, while district sales taxes - supplementary local taxes - are destination-based, because why not make california more challenging)
Illinois
Mississippi
Missouri
New Mexico
Ohio
Pennsylvania
Tennessee
Texas
Utah
Virginia
Calculating Sales Tax
When calculating the sales tax on a taxable item, the cost of the item is multiplied by the tax rate. To further illustrate, consider the following example:
In a state where the sales tax rate is six percent, the sales tax on a $10 book is 60 cents. The cost of the book to the consumer, after tax, is $10.60. The sales tax base is the total amount paid for all the goods and services subject to the tax. This is known as an ad valorem tax, which is a tax based on the price of the item sold.
Nexus
Nexus refers to the connection between a business and a state or jurisdiction. Further fueling the complex sales tax nexus, which is the tie between a seller and a state that requires the seller to collect and remit sales tax to the state. Physical presence and economic nexus are the most common forms of nexus.
Physical presence nexus
Physical presence nexus refers to the type of nexus that is established when a business has a physical presence in a state. This could be because they have a physical location in the state, such as an office or warehouse, or because they have employees or make a certain amount of sales within the state.
In the context of sales tax and use tax, physical presence nexus is one of the most common ways that a business can be subject to tax laws in a particular state. However, it’s important to note that not all states require physical presence to establish a nexus, and there are other types of nexus that can also apply.
Physical presence nexus can vary depending on the state, but usually physical nexus can be established by having, for instance, a manufacturing facility, warehouse, affiliate, or employee in a state, so make sure you consult with a qualified tax professional to make sure you are doing this by the book.
Economic nexus
As the name suggests, economic nexus is a sales tax nexus that is created when an economic activity occurs. Economic nexus refers to the type of nexus that is established based on a business’s economic activity within a state, rather than its physical presence.
So even if a business does not have a physical location or employees in a state, they may still be required to collect and remit sales tax if they meet certain economic thresholds.
These thresholds are typically based on the number of sales or transactions that a business has within the state over a certain period of time.
Economic nexus has become increasingly common in recent years, as more states have adopted laws requiring out-of-state businesses to collect and remit sales tax based on their economic activity within the state, which I think Virtual offices contributed to, but that's beside the point.
States usually have economic nexus thresholds in place and businesses may be required to register in that state and collect sales tax if they exceed the economic nexus threshold. This is regardless of where the business, warehouses, or employees are located.
Before Wayfair, nexus depended on a company’s “physical presence” in the state. However, as a result of the rulings, if a business sells goods in any state — even if they do not have a physical presence in that state (economic nexus) and the transaction is online only — it may now be obligated to register in that state and collect sales tax.
This means that, with nexus decided by different thresholds in different jurisdictions, businesses must follow nexus laws across all 50 states, rather than only those in which they have physical operations.
For companies that do business digitally, indirect tax software tools are especially important to ensure compliance with complex economic nexus laws and with states’ various sales tax requirements, so make sure to find a software best suited for your needs.
Ditching Income Tax for Sales Tax
Sales tax is the second largest revenue source, and people spending anywhere from a ⅙ to ⅔ of their income on said taxed items. Some economists who favor the sales tax say that taxing consumption is less economically distortive and more conducive to growth than taxing income.
That said, states wishing to transition from income toward consumption taxation will eventually need to create solutions with long-standing issues facing the sustainability of state sales taxes, which have not kept pace with changes in the economy and have gradually eroded over time.
So there is a tradeoff on both sides.
Reselling and Drop Shipping
Sales tax must still be remitted on drop shipping sales, but it isn’t typically collected at every stage of the transaction. In most cases:
The customer pays sales tax to the seller
The seller remits the tax to the state and provides a resale exemption certificate to the supplier
The supplier maintains the certificate as proof of a valid exemption
But as with all things sales tax, there are different liability scenarios. Sometimes the supplier is responsible for sales tax or the customer is on the hook for use tax.
The correct scenario for any transaction depends on multiple factors, including the locations of all three parties, the taxability of the goods, and where the seller and supplier have nexus, or an obligation to collect sales tax.
It is highly recommended to consult your specific tax obligations with a qualified tax professional.
Subscription Services
No matter what the cadence is, subscription charges should be treated as any other one-time charge for sales tax purposes. While it is a recurring charge, you don’t have to add any additional sales tax.
However, understanding details such as product taxability and economic nexus thresholds will be key to managing sales tax compliance for your subscription business.
That means you will need to know where you have tax obligations and Understand product taxability, that said this is a conversation to have with a qualified tax professional on your specific business, and that is where GigTax is here to help.
As someone who has ventured into self-employment via food delivery apps, the income is promising. That said, you are also faced with challenges in navigating taxes as a self-employed person and transforming your “gig” into a sustainable business.
GigTax was founded by Joseph Mayo, a seasoned Gig Worker with over 7000 deliveries across 7 platforms since 2020, and they understand the challenges of freelancers, rideshare drivers, couriers, online sellers and gig workers of all kinds!
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Book your free strategy session today at gigtaxservice.com/drivenwyld and enter code"wyld" (all lowercase) to access your special offering.
Let GigTax simplify, educate and support you on your tax journey, whether you are a gig worker making some extra money, or becoming a successful entrepreneur leading an incredible lifestyle!
Visit GigTax using the link below and get started with saving the money you made and making even more along the way!
If you would like to add some other perspective on Sales Tax and how it affects the Self-Employed and Entrepreneurial communities, feel free to email me: drivenwyld@gmail.com and who knows? Maybe your email or perspective and be featured in a post as well!
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