Sales tax and face masks
by September 3, 2023
Please note: This blog was originally published in 2020. It’s since been updated for accuracy and comprehensiveness.
Amazon, Etsy, Zazzle and other online retailers who sell masks are now facing legal action. A class action lawsuit alleges that the online retailers knowingly collected sales tax on masks in the state of Pennsylvania when masks are non-taxable in the state.
The class, headed by consumer Vince Ranalli, alleges that Amazon (and the other online retailers’) actions in collecting sales tax on non-medical masks were: “willful, wanton, oppressive, outrageous, and intentional.”
What exactly is going on here?
Medical masks, Pennsylvania and sales tax
Unlike in many other states, clothing is generally non-taxable in Pennsylvania, but some accessories are taxable. Before the pandemic, objects like surgical masks and protective masks fell into this non-taxable clothing category, but non-medical masks could be considered taxable accessories. However, when Pennsylvania governor Tom Wolf signed a state of emergency declaration due to COVID-19 back in March 2020, this established that any non-medical masks used for protection from COVID were also exempt from sales tax.
You can read more about states where clothing is and is not subject to sales tax here.
It seems that many online retailers, including Amazon and Etsy, literally did not get the memo that masks are no longer subject to Pennsylvania sales tax. According to the class action lawsuit, which is being brought by the Law Firm of Fenters Ward, Amazon and the other eCommerce businesses violated Pennsylvania law by collecting sales tax.
The suit is ongoing, though Amazon has now requested that the suit be moved to arbitration in accordance with the site’s terms of use, which, they stipulate, each buyer agrees to when clicking “Buy Now.”
What this lawsuit means for e-commerce and sales tax
Did Amazon and these other e-commerce companies named in the lawsuit “willfully, wantonly, oppressively, outrageously, and intentionally” collect sales tax on masks?
Unlikely.
Forty-six US states and Washington DC all have a sales tax. But because the US allows states to make their own rules and laws when it comes to sales tax, all retailers need to keep on top each state’s sales tax law changes. And that gets complicated.
We, of course, can’t know Amazon, Etsy or any other e-commerce retailers’ intentions, but I feel safe in saying that these companies did not viciously decide to make a cash grab by collecting sales tax from unsuspecting mask buyers.
Rather, the more likely scenario is that these e-commerce companies missed the news that non-medical masks were now tax exempt in Pennsylvania and simply did not update their automated tax collection engines to reflect the change.
This can happen to any e-commerce business. Many states are very granular when it comes to how they tax items. For example, in New York, a whole bagel is non-taxable while a bagel cut in half becomes taxable. So while it’s true that Amazon and the other e-commerce companies in the suit may have collected sales tax incorrectly, it’s very unlikely that they did this on purpose or out of greed (Of course, I’m not a legal expert, so we’ll leave all this for the courts to decide!).
All that said, this lawsuit demonstrates the importance of collecting (or not collecting) the correct amount of sales tax in your e-commerce store.
How to avoid collecting sales tax on non-taxable Iiems
If you are worried that you may be collecting sales tax incorrectly in your own e-commerce store, there are steps you can take.
Evaluate the taxability of your products in your nexus states
As mentioned above, states can be very granular in how they tax items. For example, candy is taxable in many states, except for candy bars that contain flour. In some states, those candy bars are considered “grocery items” and thus, non-taxable or taxed at a lower rate. But if you forget to code those particular candy bars as grocery items, you will accidentally collect sales tax on them. Further, most clothing is not taxable in Pennsylvania, but some things, like Halloween costumes or wedding dresses, are taxable. To avoid accidentally collecting too much sales tax:
Make sure your products are coded properly
Fortunately, there is a way to automate sales tax collection. With the TaxJar API, all you need to do is make sure you have applied the correct “product tax code” to the items you sell. For example, the product tax code in the TaxJar API for medical masks is 42131713A0001.
When your products are properly coded, TaxJar will ensure you collect the correct amount of sales tax on that item no matter how it is taxed in a state. If the item is non-taxable, TaxJar won’t collect sales tax. If it’s taxable, TaxJar will collect the exact right amount of sales tax owed based on your customer’s state, county, city, or other special taxing jurisdiction.
Example: Say you use the TaxJar API to collect the right amount of sales tax from buyers in every state, and that you have coded your medical masks with the TaxJar Product Tax code 42131713A0001.
Medical masks are non-taxable in Pennsylvania, if a Pennsylvania buyer purchases a mask from your online store powered by TaxJar’s sales tax API, then they would not be charged sales tax. But if a customer in a state, like Louisiana, where medical masks are taxable purchases the same mask, then that customer would be charged sales tax.
I accidentally collected sales tax. Now what?
With how jumbled and convoluted sales tax laws are from state to state, this does happen. Perhaps you forgot to code those flour-filled candy bars you sell properly, and you’ve been collecting sales tax on them when they should have been tax exempt.
You have options:
- Refund the sales tax to your buyer – If your buyer notices that you’ve been collecting sales tax incorrectly, you might want to make this right by refunding the sales tax. Or you may even preemptively want to refund sales tax after you’ve discovered a sales tax collection error, even if your customer hasn’t noticed.
- Turn the sales tax in to the state – Often, buyers do not notice when they’ve been incorrectly paying sales tax. The amounts are often small, and sales tax is just as confusing for consumers as it is for business owners. However, if you discover an error in your sales tax collection and you do not return sales tax to your customers, be sure to turn any sales tax you erroneously collected in to your state as part of your regular sales tax filings. By no means should you ever keep this incorrectly collected sales tax. Collecting sales tax from consumers and not remitting it to the state is illegal, with penalties resulting in fines and even jail time.
- Ensure you are collecting properly in the future – Once you discover a sales tax error, make sure you stem the tide by changing up how you collect sales tax. Use the TaxJar API to ensure you are collecting the right amount of sales tax on each of your products.
The class action lawsuit against Amazon, Etsy, Zazzle and other retailers is ongoing, so we’ll update here with any new developments.
In the meantime, it’s a good idea to evaluate how you are collecting sales tax on your products, so you are not subject to a similar fate.
Ready to automate sales tax? Ready to be sure you’re collecting the right amount of sales tax on each of your products every time? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.
