US Taxation: Product Classification

When dealing with customers based in the US, you might find yourself having to pay sales tax as dictated by the state your customer is located in. Sales tax in the US is not uniformly implemented throughout the entire country but is instead given to each individual state to govern. On top of this, there might also be additional local taxing jurisdictions, dependent on the state. Therefore, the US tax system is a complicated system to navigate.

Fortunately, Deskera Books' software is able to determine the sales taxes required for products and services sold to a customer.

The US Taxation article series is to help you understand how US sales taxes are being calculated. However, you do not need to worry about manually calculating the sales taxes.

There are some factors to consider when calculating US sales tax:

1. Nexus
2. Product Classification
3. Exemption from sales tax
4. Out of state transactions - Origin VS Destination State Tax

In this article, we will briefly discuss Product Classification. You may also click on the other points to read more about what they entail.

Why is product classification important?

Classifying your products in the correct category is very important as it determines if the products sold are liable for US sales tax. Not all types of products are taxable, dependent on the state/s that are involved during the transaction.

In general, the US sales tax is most commonly applied to tangible personal property. Sales tax is typically NOT applied for products bought for resale.

There are three main categories for products: clothing, food, and services. Each state has its own definition of what matches the criteria to fall under a specific category.

Clothing

• The criteria might be as long as the clothing product falls in a specific subcategory, or in the form of a value threshold (>$x transaction for the purchase of a specific subcategory of clothing).
• Some states differ in their definition of certain types of clothes, e.g. sportswear, fur clothing, etc.
  
  

Food

• This includes both prepared food and food ingredients.
• In general, most states tax prepared food and exempt food ingredients.
• The state of the food might also determine whether it is taxable or not (heated vs. unheated).
• If the establishment provides a seating area or utensils for the consumption of food, this might also make them liable for sales tax for transactions involving the sale of these food items.
  
  

Services

• These include architectural services, engineering services, etc.
• Traditionally, services were not subject to taxes. However, they are increasingly becoming taxable in various different states.

There are also various other categories, such as property and certain intangible goods like digital software that are also subject to taxes in certain states.

What does this mean for me as a Deskera user?

Deskera has a list of product categories based on the software and the users can use their search engine to identify the product category relevant to their products. Once they have identified the right category for their products, they can then classify the products to that particular category.

In return, our system will determine the product category code and map it according to the right tax code, as per ship-from and ship-to address tax code.