Determining the correct tax to apply to your invoices means accounting for the tax that applies to the products listed in your product catalog: some types of products are taxed differently in the US (for example, food products are tax exempt in California).
Tax levels that apply to a particular address (buyer): state, county, city, local and special district tax (for example, Minnesota’s sales tax rate is 6.875%, but can be as high as 8.375%, depending on local and county taxes). The key is to use the customer’s full address (not just their zip code) to keep you informed of the tax you should charge – each tax jurisdiction is defined by different criteria and can vary from one zip code to another.
Sales Tax Exceptions
As mentioned, you should check with your state government to determine what goods and services sold in your state are subject to sales tax. That said, the following transactions are generally not taxable:
Resale of goods – Retailers and resellers are generally not required to pay sales tax on wholesale purchases because the end consumer is expected to pay sales tax on those goods at the time of purchase.
Raw materials – If you produce and sell goods that will be raw materials for other goods, these goods are generally considered exempt from sales tax.
Non-profit goods – Sales to non-profit goods are exempt from sales tax in some cases. If you sell an item to a non-profit organization, be sure to get a copy of their tax exemption certificate (issued by the state).
State Exemptions – Many states offer limited periods during which purchases can be made tax-free, it’s worth keeping an eye out for (for example, Texas offers an August sales tax exemption during the period leading up to the start of the new school year). These are commonly referred to as “sales tax holidays.”