Introducing our Sales Tax Automation 101 series. The first installment covers the basics of sales tax automation: what it is and how it can help your business.
Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. New Jersey first adopted a general state sales tax in 1935 at a rate of 2 percent, but it was quickly repealed. It was reinstituted at 3 percent in 1966, and since that time, the base sales tax rate has risen to 6.625 percent. New Jersey does not generally allow the imposition of local sales tax, although certain locations may impose special luxury or tourism sales taxes. And in established Urban Enterprise Zones, qualified businesses with a UZ-2 certificate may charge sales tax at half the regular rate on certain sales.
As a business owner selling taxable goods or services, you act as an agent of the state of New Jersey by collecting tax from purchasers and passing it along to the appropriate tax authority. As of March 2019, sales and use tax in New Jersey is administered by the New Jersey Division of Taxation.
Any sales tax collected from customers belongs to the state of New Jersey, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.
In New Jersey, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto tax collector.
To help you determine whether you need to collect sales tax in New Jersey, start by answering these three questions:
If the answer to all three questions is yes, then you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.
If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.
It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.
The need to collect sales tax in New Jersey is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.
Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.
In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.
While physical presence still triggers a sales tax collection obligation in New Jersey, it’s now possible for out-of-state sellers to have sales tax nexus with New Jersey.
Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:
Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise, and:
Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after November 1, 2018, a remote seller must register then collect and remit New Jersey sales tax if the remote seller meets either of the following criteria (the economic thresholds):
Marketplace sales: Making sales through a marketplace. Effective November 1, 2018, marketplace facilitators are responsible for collecting and remitting sales tax on behalf of marketplace sellers in New Jersey, regardless of whether the marketplace seller is above or below either of the economic thresholds.
Please note that remote sellers aren’t required to collect and remit sales tax on their marketplace sales of tangible personal property, specified digital products, or services delivered into New Jersey. New Jersey law requires the marketplace facilitator to collect and remit sales tax on all marketplace transactions, regardless of whether the marketplace seller meets either of the economic thresholds.
However, remote sellers that make sales through marketplaces and other channels may have a sales tax collection obligation for their non-marketplace sales.
Trade shows: Attending conventions or trade shows in New Jersey. You may be liable for collecting and remitting New Jersey use tax on retail sales of products or services made during New Jersey conventions or trade shows.
If you have sales tax nexus in New Jersey, you’re required to register with the New Jersey Division of Taxation and to charge, collect, and remit the appropriate tax to the state.
Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of December 2018, New Jersey does not have an explicitly defined trailing nexus policy.
If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in New Jersey.
If you sell taxable goods to New Jersey residents and have inventory stored in the state, you may have nexus and an obligation to collect and remit tax. Although marketplaces are required by law to collect and remit tax on all marketplace transactions delivered into New Jersey, marketplace sellers may be required to collect and remit tax on sales made through other channels.
To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.
In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).
New Jersey generally uses destination-based sourcing. In New Jersey, the sales tax rate is generally determined by the point of delivery, which is where ownership and/or possession of the item is transferred by the seller to the purchaser. For services, the rate is based on where the service is delivered, or where the property on which the service is performed is delivered.
For additional information, see the New Jersey Division of Taxation.