"Why is there no tax on this transaction?" That's one of the most common questions asked about tax software. A tax calculation involves many different factors, so let’s begin by analyzing all the reasons that AvaTax returns zero tax on a transaction.

In the United States, a company may not be compelled to collect tax. This happens when the company sells a product in a jurisdiction where they aren't set up to collect tax. In this case, the responsibility to pay consumer use tax falls to the buyer.

Some states in the United States have zero sales or use tax rates.

Some products are nontaxable, or exempt, or have their tax rate set to zero. Some jurisdictions use the phrase "Nontaxable" to refer to product taxability, while others refer to this as an "Exemption" or a "Zero-Rate."

The company isn't set up to collect tax in a jurisdiction

The most common reason that AvaTax returns zero tax is because the company wasn't set up to collect tax in a jurisdiction.

When using AvaTax, your company must decide the jurisdictions where it collects taxes and where it doesn't. This selection is used to determine whether you’re obligated to collect taxes. For example, consider a company configured to collect tax in Massachusetts, but not in Rhode Island. In this case, a sales tax calculation on a taxable item for a customer in Rhode Island will result in zero tax. According to legal precedents in the United States, this zero tax means that it's the responsibility of the buyer to determine the correct tax to pay to the tax authority. This tax obligation is called “consumer use tax.”

Be careful not to misuse information about taxable jurisdictions. Even if a company isn't set up to collect tax in a jurisdiction, that company must still call AvaTax to record its transactions. The Avalara Managed Returns Service reports transactions including exempt dollar amounts based on legal filing requirements. Even jurisdictions where a company is set up to collect tax can sometimes require tax reporting. Also, companies can change these declarations at any time - so always call the CreateTransactions API even if you believe that the company hasn't declared to collect tax in a particular jurisdiction.

States without sales tax

Some states or tax authorities in the United States don't collect sales, use, or transaction taxes. In this case, transactions will correctly show zero tax, unless they trigger special excise taxes or other functionality.

Let’s look briefly at the status of sales tax in a few notable states. These states are often called the “NOMAD” states, after an acronym that lists the state names: New Hampshire, Oregon, Montana, Alaska, and Delaware.

Alaska doesn't have a state sales tax. However, Alaska is also what is known as a "Home Rule" state, where individual cities and counties are granted the authority to levy and administer their own sales taxes. This means that, although you might not calculate state sales tax in Alaska, local jurisdictions within Alaska will request that you pay sales, seller's use, or consumer use tax if you’ll collect tax within that jurisdiction. Because of this Home Rule designation, companies must correctly declare that they’ll collect tax within Alaska and within local jurisdictions within the state of Alaska, even though the state itself doesn’t charge sales tax.

Delaware doesn't have a sales tax, but it does impose other taxes on businesses based on their gross sales. These taxes aren't calculated transactionally, which means they won't show up on your AvaTax transactions.

Montana, New Hampshire, and Oregon prohibit local jurisdictions within the state from levying sales taxes. As a result, these three states don't have any sales tax, either at a local or state level.

Although these states don't charge sales tax, ensure that your connector still records tax correctly. Avalara Certified Connectors must record transactions in AvaTax even if the transaction is within these NOMAD states. This is necessary because:

Laws can change. Avalara continually researches tax laws and updates our software promptly when any changes affect correct tax calculation. If any state changes its tax laws, your customers shouldn't have to update their connector.

Sourcing rules can change. Some states can change their tax rules to determine the origin or destination of a transaction differently based on other factors, such as the billing address or the call center address of a transaction. In this case, a transaction that was previously nontaxable based on a NOMAD state law may become taxable based on the origination of the shipment.

Tax types can change. Depending on your customer's subscriptions, Avalara provides support for excise, telecommunications, E-Waste, bottle taxes, and more. These tax types may not always be exempt in NOMAD states.

Tax rate of zero for a product

Transactions can also have zero tax if they involve products deemed as nontaxable. Some jurisdictions may choose not to tax certain products, or to tax them only in certain conditions. The jurisdiction may choose to call the product “exempt from tax,” or “nontaxable,” or simply a product with a zero tax rate. AvaTax will determine the taxability of the product based on the tax code that you provide.

Tax override of zero

If you use a tax override to import tax calculated by a different tax engine, AvaTax may assign zero tax to your transaction to match the functionality of your older software.

Reasons tax can be zero