Sales Tax for the Clothing and Apparel Industry
From Corsets to Choir Robes
Whether you sell clothing and apparel in New York, California, Texas, Florida (the four most populous states in the U.S.) or anywhere in between, handling sales tax is considerably less interesting than calculating per capita industrial tarp usage. Yet in the gloomy realm of dull but critical compliance-related tasks, sales tax management wields mighty powers. With the right tools, strong sales tax management can lead to streamlined processes, stronger financials, and cost savings. Handled incorrectly, sales tax can unravel the fabric of your bottom line with costly audit fines, penalties, and interest.
Why must a person, a creative beleaguered person such as yourself, toil under the hardboiled rules of commerce and compliance like a shopping-weary big box customer on Christmas Eve? Ignore, underestimate, or relegate sales tax to the Excel spreadsheets of the back office if you must, but a penny saved is a penny earned when it comes to developing a sales tax strategy that works. Sales tax for the clothing and apparel industry dives into the deep dark caverns of product taxability, an area of complexity so arcane, even the most intrepid sales tax expert can lose her way. Luckily, there are four truths that can shed light on the process of developing an effective sales tax management strategy.
You can’t be a tax expert in every state. We were growing as a company and in retail locations when we decided it was time to update our logic and have an automated system that would calculate the rates for that retail location for us.—sales tax manager at leading footwear manufacturer.
Depending on where you have nexus (sales tax obligations because of your connections with a state), your company is subject to a vast network of sales tax rules and rates. If you’re a multi-state seller, an online retailer, a business expanding into new markets, or a company changing your product offerings, you likely have sales tax connections (nexus) in multiple locations. Whether you have a physical presence in a particular state isn’t the only indicator of a collection obligation. In New York, for example, using an affiliate to advertise one of your products, which then is clicked and ordered via that site, can trigger nexus. An out-of-state retailer that uses a Florida drop shipper to deliver a product is required to collect sales tax in Florida.
Determining where tax obligations exist is only the beginning. Each state (or taxing jurisdiction or locality) specifies the rate of sales tax, which clothing items are taxable, and when holidays or exemptions apply. Despite the fact that clothing is taxable in many states, there are many specific exemptions, thresholds and special tax treatments and definitions to drive even the most brilliant tax expert mad.
You just can’t be a sales tax expert in every state. That’s why many in the clothing and apparel industry are looking for an easier way to manage sales tax nexus rules, rates and boundaries as they relate to product taxability (shameless plug for Avalara AvaTax: www.avalara.com/products/avatax)
You don’t know which clothing and apparel items are tax-exempt until you do. U.S. sales tax rates vary from state to state, county to county, and city by city. It’s a complicated situation that’s impossible to manage manually—head of ecommerce at well-known industry clothing and apparel retailer.
The way states determine product taxability is all over the map. Belts taxable? Doesn’t mean shoes are. Work attire like hard hats exempt? Doesn’t mean overalls are. In Virginia, both corsets and choir robes are considered tax-exempt during specified dates, whereas in some counties in New York State, these items would only be exempt if they cost less than $110. Whether a clothing item is tax-exempt relates to state and local rules about blanket product exemptions. In the case of a tax-exempt transaction, the onus is on the seller to collect and manage exemption certificates as well as track changing product taxability rules and thresholds.
“General use” clothing (defined differently between states) is usually taxable, but a handful of states either exempt specific clothing items (e.g., Minnesota, Pennsylvania), or impose thresholds (e.g., New York, Massachusetts). There are states where clothing gets special treatment (e.g., Rhode Island, Vermont). In Pennsylvania, general clothing is exempt, but formal wear is not.
In New York State, for example, general clothing is exempt from local sales tax if under $110, but only in certain jurisdictions (New York City and a handful of counties including Chenanga, Columbia, and Chatauqua); if an item retails for more than $110, the entire amount is taxable. The remaining localities do impose local sales and use tax in place of the state sales tax. Even though some states do not impose a sales tax requirement on sellers at the state levels, plenty of localities are allowed to do so. For example, Madison County in New York State offers no exemption for clothing, choosing instead to impose a local tax of 4% on clothing sales.
And then there are sales tax holidays (think back-to-school shopping).
Sales tax holidays change more frequently than skirt lengths. Sales tax holidays are used by states to bolster economic growth (or so the story goes). They refer to specific days and times during which consumers can purchase items such as clothing and apparel without paying sales tax. Many states offer tax-free shopping days around major holidays and back-to-school times. Keep in mind these holidays change frequently and are usually specified within the state statute. In Texas, for example, back to school clothing and supplies (defined in tax code) are tax-exempt relative to the first day a Texas school district commences classes.
It is important to note that clothing sold from business to business (e.g. a vendor who sells Avalara t-shirts and other apparel to us), typically does not benefit from sales tax holidays, whereas sales to consumers qualify for most back-to-school holidays. In Virginia, the August School Supplies and Clothing holiday does not relate only to school clothes. This explains the inclusion of “beach wear” and “steel-toed boots” in the list of qualifying apparel.
It’s also important to note that most state Departments of Revenue do not issue official sales tax holidays for the year until close to the actual date (another great reason to automate sales tax). Some of the published 2014 sales tax holidays relating to clothing and apparel include:
Maryland: Maryland Tax Free Week, August 3-9 (for clothing and shoes less than $100).
North Carolina: August sales tax holiday; first Friday-Sunday in August for clothing items less than $100.
Texas: Clothing and school supplies-date varies depending on the first day a Texas school district begins.
Content is King Whether you’re a clothing and apparel retailer, manufacturer, or distributor, access to real-time product taxability rules and rates calls for more than manual look-ups and alerts from departments of revenue. Even if definitions of clothing and apparel were consistent between states, and even if taxing jurisdictions treated every clothing product the same, managing product taxability as your business grows and as your product catalog changes is impossible. When it comes to sales tax compliance, access to product taxability content, like access to quality materials, is critical. Unlike errors in production or a decline in overall sales, however, errors in sales tax calculations or mismanagement of exemption certificates can result in audit fines, penalties, and interest.
In today’s omni-channel commerce environment, transactions occur at stores, online, and over the phone. Most clothing and apparel sellers utilize POS, mobile, ERP, and ecommerce as a means to reach customers and expand market reach, and within each channel there are potentially nexus-creating elements that change the sales tax game entirely. Given state and federal efforts to broaden when, where, and how you charge, remit, and file sales tax, doing sales tax right is increasingly difficult.
Without an automated system that precisely determines rates, identifies and validates addresses, and fully integrates product taxability content, businesses are under-prepared for the current reality and more likely than not to experience expensive, difficult audits. Thousands of predefined product system tax codes built into a sales tax automation engine helps assign the right rules to the right clothing and apparel items. When content is automatically updated as laws change (in the EU as well as in the U.S.) you’re empowered to get it right.
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