The most wonderful time of the year is coming up, and that means that online fashion retailers will need to maximize every minute of time to take advantage of the holiday rush. And one thing you don’t want to spend time on during the holidays is troubleshooting sales tax. These tips will help fashion retailers ensure that you don’t hit any sales tax snags in Q4.
Tip 1: Ensure You’re Not Over Collecting Sales Tax
One special consideration for fashion retailers is that not all states consider clothing taxable. For example, Pennsylvanians are very proud of the fact that clothing isn’t taxable in their state. So if you accidentally charge sales tax on a pair of jeans to a customer in Philly, you’re potentially going to end up with an unhappy customer! Not to mention you’ll owe them a refund.
Other states are even more confusing when it comes to sales tax on clothing. In New York, clothing priced at $110 or less is non-taxable. With the exception of some local areas—where clothing less than $110 is exempt from New York state tax but not local (county, city, etc.) tax.
Massachusetts is another exception. Clothing items above $175 are taxable at the statewide Massachusetts rate of 6.25 percent. But that’s where things can get a little tricky for online sellers. Only the price of the item beyond the non-taxable $175 is taxable. So if you sell a cozy crewneck sweater to someone in Massachusetts for $200, only $25 of that sell price would be subject to Massachusetts sales tax.
Here’s a map of states where clothing is and is not taxable:
Tip 2: Ensure You’re Not Under Collecting Sales Tax
There’s also a risk of under-collecting sales tax during Q4. Sales tax rates change often, and if your online shopping cart or marketplace hasn’t kept up with the times, you may end up not collecting enough sales tax on a sale. If you repeat this process too often, you could end up owing a large chunk of change out of your profits when it comes time to pay the sales tax collector.
That’s why it pays to take a few minutes and ensure your sales tax settings are set up correctly. Be sure to do these two things:
- If you have any custom rates (such as in states that tax clothing differently), be sure that they are still correct. You can always use a sales tax calculator to double check.
- If you have started collecting sales tax in a new state, ensure that you are collecting sales tax in that state on all of your online shopping carts and marketplaces. It’s a common pitfall to forget to set up sales tax in one state on a new shopping cart and marketplace. But if you do, you could end up owing sales tax from your bottom line.
Tip 3: Ensure You’re Collecting Sales Tax Correctly on Shipping and Gift Wrapping
Both shipping and gift wrapping are taxable… in some states.
If you charge your customers shipping charges to deliver your product to their homes, and the item is considered taxable, then some states say you should charge sales tax on that shipping charge.
Example: You sell a pleated velvet dress for $200, and charge $5 in shipping. In states where shipping is taxable, the transaction total is $205 and you should charge sales tax on the entire transaction price.
But in states where shipping is not considered taxable, you would only be required to charge sales tax on the $200 price of the dress, and not on the $5 shipping charge.
You can see a list of states where shipping is taxable here.
The same goes for gift wrapping. Some states consider gift wrapping services you offer your buyers to be a taxable service. So if you provide this little something extra, be sure you know whether your state wants to charge sales tax on it.
You can see a list of states where gift wrapping is taxable here.
Double checking these three aspects of your business’s sales tax collection now can save you a headache as Q4 piles on. For more about sales tax, check out our Sales Tax 101 for Online Sellers Guide!
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