Understanding U.S. Sales Tax on Gumroad
We know that calculating and collecting sales tax can be difficult, so we've created this page to try to make it as easy as possible to understand. Although we can't promise that dealing with sales tax will be entirely stress-free, we think there are some features and tools you can use on Gumroad that may be of great help!
NOTE: The Gumroad sales tax function currently only works for sellers based in the United States. If you do not live in the United States, none of the following applies to you - sorry! Please email us for help or questions you have.
Before you read on, we strongly encourage you to consult your local tax professional prior to making any pricing or financial decision, as this article should not be construed as tax or legal advice. Also, this article intends to address only U.S. sales tax matters — not federal or international tax matters.
SECOND NOTE: Due to some apparent confusion about this article, Gumroad does NOT add sales tax to digital items sold in the US. We merely help you calculate and remit sales tax on digital items sold in the US.
Generally speaking, the applicability of sales tax equals:
Seller's nexus state+ Buyer in seller's nexus state + Taxable product
1. Determining nexus
How do I determine nexus? The tricky part about this question is that there isn't a one-size-fits-all definition of what constitutes a nexus, although most courts and scholars equate it with "sufficient physical presence" in a state. Perhaps the best way to illustrate nexus is by way of a simple example.
Let's say your company has its headquarters in California; sales teams in Pennsylvania and New York; and fulfillment centers in Ohio and Nevada. For purposes of this example, you can probably safely assume that you have nexus in California, Pennsylvania, New York, Ohio and Nevada. Therefore, if you had a buyer from any of these five states, you would have a legal basis (though not necessarily a requirement, as described below) to collect sales tax.
Please note that participating in an affiliate program (including Gumroad's) may make you subject to the tax laws of the affiliate's state and, therefore, may impact sales across multiple platforms you use — not just sales made through Gumroad.
Determining nexus is particular to every seller, so we encourage you to consult your local tax professional.
2. Applying for sales tax permits
Now that you've established nexus with a state, the next step is usually to apply for that state's sales tax permit (note that the name of the permit may differ from state to state). A sales tax permit, simply put, allows you to collect sales tax from your buyers and remit it back to the state's tax or revenue agency (again, the name of the agency differs from state to state). For example, a seller in California would apply for a Seller's Permit through the state's Board of Equalization.
Many states allow you to register for a permit online — some for free, others for a fee. For more information about sales tax permits, please consult your local tax professional. You can also learn more tax agencies in your state here.
3. Determining taxable products
Chances are that if you sell a physical product that would be considered a taxable good at retail, you're required to collect sales tax from the buyer.
However, there may be cases where the physical product is exempt from sales tax altogether. For example, in Minnesota, some clothing for general use (e.g. earmuffs, scarves, and even diapers!) is exempt from sales tax. Being exempt from sales tax simply means that you do not have to collect sales tax on your product at all. To add one more wrinkle, some states have "sales tax holidays," where would-be taxable goods are tax-free for just a few days out of the year.
For more information on the taxability of your products, please refer to your local tax professional because it's ultimately up to you to collect and remit the proper sales tax amounts.
4. Enabling sales tax
Now that you have figured out which states you have nexus in, are armed with the proper permits, and have determined that your product is taxable, you're ready to collect sales tax on taxable purchases.
Note:Initially, our sales tax feature will be rolled out in phases. If you're interested in being part of an upcoming rollout, please email firstname.lastname@example.org.
Start by visiting your Gumroad Settings and scrolling down to "Apply sales tax in…" Select the states where you have nexus (and proper sales tax permits!) from the dropdown menu that appears when you begin typing.
Click "Save account settings" to start collecting sales tax on physical product sales in the states where you have nexus. You'll now see sales tax details when editing a new or existing physical product.
You can modify your sales tax settings at any time, just in case you no longer have nexus in a certain state or your company really thrives and expands operations (ahem, establishes nexus) in additional states. Please note, however, that any changes you make to the nexus states will not apply retroactively to previous purchases.
Inclusive vs. exclusive sales tax
Once you've enabled sales tax, you have the option of including sales tax in the price of your product or charging sales tax on top of the price of your product. Whether you include sales tax in your product's price or charge sales tax on top of the price is completely up to you.
Now that you've enabled sales tax, you'll see a sales tax toolbar above the product description when editing a physical product. To charge sales tax on top of the price of your product, check the box next to "Collect sales tax on top of this price." Otherwise, sales tax will be included as part of your product's retail price.
Tax-exempt and non-taxable products
You can choose whether or not to collect sales tax in each of the states where you have nexus on a product-by-product basis. Keep in mind that you should always refer to your local tax professional before making decisions about the the taxability of your products.
When editing a physical product, you'll see checkboxes next to each of the states where you have nexus. If you happen to have nexus in a state, but are selling a product that is tax-exempt or non-taxable, you can make the necessary adjustments by unchecking the box next to the appropriate state.
Remember that any changes you make to the states where you're collecting sales tax for a particular product will not apply retroactively to previous purchases.
5. Using the sales tax estimator
With the Gumroad Sales Tax Estimator you may be able to better price your product.
If you choose to include sales tax in the price of your product, the estimated total price in each state will be equivalent to the price of your product. On the other hand, if you choose to charge sales tax on top of the price of your product (by checking the box next to "Collect sales tax on top of this price"), the amounts in the table will reflect the estimated total price of your product, inclusive of the estimated applicable sales tax.
That last bit bears repeating:The amounts shown reflect the estimated total price of your product, inclusive of the estimated applicable sales tax. Keep in mind that the actual sales tax applied may vary by location, product type, and/or other factors. We strongly recommend that you consult your local tax professional or authority prior to making any final pricing decisions.
6. The customer checkout experience
Once you've published your product, sales tax collection is triggered (or not) by the address entered by each customer during checkout. Only those customers located in states where you've chosen to collect sales tax will be charged sales tax. In these cases, a notification will appear above the "Pay" button, letting customers know exactly how much they'll be charged including sales tax.
After purchase, customers can look to their receipt for a breakdown of how much sales tax they paid and whether this sales tax was included in the product's retail price or charged on top of the product's retail price.
7. Exporting sales tax data
You can see a breakdown of how much sales tax you've collected by exporting a CSV file (which stands for "comma separated value" — it's basically a spreadsheet) of customer purchase information. Visit your "Customers" tab and click the "Filter" button to look at customers of an individual product. Then, click the "Export" button, select your desired date range, and click "Download."
For each customer, the CSV file's "Sale Price ($)" column shows the total amount paid, including sales tax. The "Taxes ($)" column shows how much sales tax was charged. The "Tax Included" column indicates whether sales tax was included in the product's retail price (indicated by a "1") or charged on top of the product's retail price (indicated by a "0").
8. Remitting sales tax
Now that you've collected sales tax, it's up to you (and only you) to double-check, reconcile, and pay the sales tax owed (aka, remit) to the appropriate tax collecting agency. We highly recommend that you consult with your local tax professional since the frequency and method of remittance may vary from state to state.
And there you have it — sales tax, ladies and gentlemen.