Fashion is eccentric and never the same, the same goes for sales tax on clothing. Anyone selling clothing in the US is subject to sales tax regulations. What’s more they vary a lot from state to state due to tax holidays and general regulations. Do they have a luxury for clothes in Nebraska? Are clothes even taxed in Alabama? In this article, we sew together all you need to know about sales tax obligations if you’re selling clothing online.
Understanding Sales Tax on Clothing
Nothing is simple regarding sales tax on clothing in the US. But there is beauty in the tapestry of different tax rates, tax holidays, and general regulations on the level at which clothing is taxed. (At least we think so.) In some states, footwear and apparel are 100% tax-exempt, while in others, there’s a price to pay for fashion due to a $1000 luxury threshold, at which point clothing becomes taxable.
There’s a sales tax on footwear and apparel across almost 40 states, but it is completely tax-free in five states (except for Alaska). However, even in states where clothing isn’t taxed, economic nexus may be triggered when a company selling clothing online exceeds certain thresholds – usually $100,000 or 200 transactions.
Taxable vs. non-taxable states
Clothing is either taxable or non-taxable for business owners. But there are also exemptions to the rule.
- If you include Puerto Rico and Washington, D.C., Clothing is generally subject to sales tax in almost 40 states
- However, clothing is tax-exempt in four states: Delaware, Montana, New Hampshire, and Oregon.
- In some states, there are luxury thresholds at which clothing becomes taxable
Exemptions
In some states, certain items of clothing are exempt up to a certain price threshold from sales tax, while special exemptions might apply for specific types of clothing.
The taxable amount on clothing fluctuates between states – from total exemption in states like Oregon to sales tax as high as 7% in Mississippi and Rhode Island. Read on as we pull at this thread to make it easier for companies to stay compliant.
- Some states have specific exemptions for certain types of clothing or transactions
- In Mississippi, clothing, footwear, and accessories used in motion pictures may be exempt
- In Idaho, some exemptions regarding free clothing for charity apply.
- In California and Tennessee, some nonprofits and thrift stores providing clothing to people in need are exempt
- In Ohio, Virginia, and South Carolina, some protective clothing may be tax-exempt
- In Connecticut, clothing and footwear priced at over $1,000 is subject to the luxury goods tax
Nexus and Sales Tax on Clothing
Sales tax nexus (the connection between a taxing jurisdiction and an entity) is established when a business has a physical presence in a state, such as a brick-and-mortar store or warehouse. Understanding the legal concept of nexus is crucial, irrespective of whether you sell clothing or any product or service online in the US. If you’re smashing it this year selling fashion online, it’s well worth exploring how to start navigating nexus.
Physical nexus
If your inventory is stored in a particular state, it can trigger a physical nexus requiring you to collect and remit sales tax there. Here’s a quick outline of the concept, but if you’d like to dive deeper, we’ve got you covered here.
- Physical nexus is established when a business has a direct connection with a state that allows the state to impose sales tax obligations on the company.
- Physical nexus can be triggered by various activities, such as having a physical location, employees, inventory, or other property in the state.
- If your business has physical nexus in a state, you are generally required to collect and remit sales tax on taxable transactions within that state.
- For example, if a business stores inventory in a particular state, it can trigger a physical nexus requiring it to collect and remit sales tax there.
Economic nexus
For companies that sell clothing online, an economic nexus may be triggered when sales exceed certain thresholds set by particular states, making companies liable to collect and remit sales tax.
- Economic nexus is created when a business reaches a certain threshold of economic activity in a given state, typically the number of sales or amount of revenue generated
- Take note: Economic nexus isn’t reliant on whether your business has a direct presence in a state, unlike physical nexus
- If your company sells clothing online, an economic nexus may be triggered when sales exceed certain thresholds set by particular states, making companies liable to collect and remit sales tax
- Economic nexus legislation generally requires an out-of-state retailer to collect sales tax if they exceed a certain threshold of sales in a state
State-by-State Sales Tax Regulations
Every state in the country can specify the sales tax rate, which items are taxable, and when exemptions or holidays apply. US sales tax rates vary from state to state, county to county, and city by city. As such, clothing tax rules vary across states, and exemptions, thresholds, and unique tax treatments can complicate the process. Generally, most states charge their sales tax rate on clothing. However, we’ll be examining the outlier states below.
Tax-exempt states
Want to pocket the profits of not paying sales tax on clothing? Welcome to the NOMAD states: Alaska, Montana, New Hampshire, Oregon, and Delaware, where clothing is entirely exempt from sales tax. But, (there is always a but with US sales tax).
If you sell clothing online in the First State, the Delaware Division of Revenue will hold your company accountable for paying Gross Receipts Tax (GRT), which applies to your total receipts. Delaware’s tax rate for GRT ranges from 0.0945% to 1.9914%, depending on the business activity. In cases where you derive income from more than one type of activity, separate gross receipts tax reporting is required. One last thing to remember: the business activity you’re engaged in will determine whether gross receipts tax is remitted monthly or quarterly. To learn more, visit the Delaware Division of Revenue website.
Alaska is another state that doesn’t charge sales tax on clothing. However, if you’re selling clothing in the Last Frontier, you should know that the state’s 165 incorporated municipalities can set and collect sales tax on apparel ranging from 1% to 7%. So, if you sell clothing in Alaska, it pays to be aware of the specific sales tax regulations and rates imposed by each municipality where you conduct business. The Alaska Sales Tax Information provided by the Office of the State Assessor advises companies subject to sales taxes within the state to contact the local municipal government for their particular sales tax regulations and forms – and we do, too.
States with a luxury sales tax
Connecticut is the only state to charge sales tax on clothing and footwear by imposing a luxury tax on all items priced above the threshold of $1000. In the “Land of Steady Habits,” this luxury tax on threads is 7.75%, much higher than the state’s general sales tax rate of 6.35%. Is your clothing company selling clothing online to fashionistas with deep pockets in Connecticut? Remember, you’re responsible for collecting and remitting the luxury and regular sales taxes.
States with sales tax exemptions on clothing
In an effort to keep clothing and footwear affordable to everyone, New York City is the only state in the country where clothing and footwear selling for less than $110 per item is exempt from the New York State 4% sales and use taxes. For all other clothing items over $110 in your e-shop, the Big Apple levies a sales tax ranging from 7% to 8.875%, with most counties and cities charging a sales tax of 8%.
States with economic nexus
In 46 states across the country, economic nexus laws are in place that oblige out-of-state sellers to collect and remit sales tax once their sales transactions surpass a certain predetermined threshold. This regulation applies to any item of sale, clothing included.
The sales thresholds establishing economic nexus vary from state to state, ranging from $10,000 to $500,000. Most states take the legislative position that an organization has economic nexus if it has annual retail sales of goods or services into the state that surpass a dollar threshold, e.g., (usually) $100,000, or if the company makes a specified number of sales transactions, e.g., 200 or more, into the state.
It’s time to take a closer look at some examples:
- District of Columbia: $100,000 in sales or 200 or more transactions in the current or previous calendar year
- New York: $500,000 in sales or 100 transactions in the current or last calendar year (but clothing selling for less than $110 doesn’t factor into this calculation)
- States like Iowa, Georgia, and Hawaii: $100,000 in sales or 200 or more transactions in the current or previous calendar year
- Idaho and Washington: $100,000 in sales in the previous or current calendar year
Comply in style: Confident sales tax on clothing
Sales tax in individual states are as eccentric and subject to shifts over time as a fashion brand. As daunting as it may seem, the price of not staying on top of regulations across state lines can lead to hefty penalties, putting people at that company at risk. Don’t let sales tax on clothing trip you up. Comply helps companies of all sizes put their tax compliance on autopilot. If you’re tearing it up online selling fashion and footwear in the United States this year, feel free to connect with our team.
