Guide to US Sales Tax Taxability and Rates

This article outlines how Kintsugi determines whether a product or service is taxable, how applicable tax rates are assigned, and the common taxability scenarios you may encounter when processing transactions.

What Is Taxability?

Taxability refers to whether a product or service is subject to sales tax in a given jurisdiction. Not everything you sell is automatically taxable, and the rules differ by state. What is taxable in one state may be fully exempt in another.

Kintsugi applies taxability rules at the product category level. When you map your products to a category in Kintsugi, the system determines the correct tax treatment for each state automatically.

How Tax Rates Are Calculated

A tax rate is the combined percentage applied to a taxable transaction. It is made up of layers from the state, county, city, and special districts. Kintsugi calculates the full combined rate based on the transaction's delivery address (destination-based) or the seller's location (origin-based), depending on the state.

Common Product Taxability Scenarios

Below are some of the most common product types and how their taxability varies across states:

Physical Goods

Tangible personal property is taxable in most states by default. If you sell physical products, you generally need to collect sales tax in states where you have nexus, unless a specific exemption applies.

SaaS (Software as a Service)

SaaS taxability varies significantly by state. Some states tax it fully, some partially, and others not at all.

For further information, please consult the following help article: Understanding SaaS Taxability and Nexus Obligations: A Multi-State Guide

Clothing and Apparel

Clothing taxability is among the most state-specific categories. Minnesota exempts most clothing from sales tax, while Connecticut applies its standard rate to items under $1,000 but a luxury goods rate of 7.75% to items over $1,000. New York exempts clothing items under $110 per item. Using the correct product category in Kintsugi is critical for accurate results.

Dietary Supplements and Food

Dietary supplements are exempt in several states, including Texas, Florida, and New Jersey, where they are treated similarly to food products. Groceries and food items often carry reduced or zero rates. Candy and snack foods are frequently taxed differently from staple groceries. Illinois, for example, applies a 1% reduced rate to qualifying food and dietary supplement items.

Shipping and Handling

Shipping taxability varies by state and by how the charge is presented on the invoice. Key rules to know:

• In Florida, shipping is taxable if it is mandatory and unavoidable. It is exempt only if separately stated and the customer has the option to arrange their own pickup.

• In Alabama, separately stated shipping via a common carrier (such as USPS) is generally not taxable. Combined shipping and handling charges are taxable.

• In Washington DC, separately stated shipping is not taxable if it does not include handling.

• Kintsugi recommends mapping shipping line items with the appropriate shipping tax code to ensure correct treatment.

Tips and Gratuities

Voluntary tips, where the customer determines the amount, are exempt from sales tax and should be categorized as MISC_EXEMPT in Kintsugi. Mandatory service charges (such as an automatic gratuity added to a large-party bill) are generally taxable.

Cannabis Products

Cannabis is subject to both sales tax and excise tax in states where it is legal. Kintsugi supports cannabis taxability and registration in applicable states. Excise tax support is available in states where Kintsugi has implemented it. For questions about your specific state, contact the Kintsugi support team.

What Happens When a Product Is Uncategorized?

If a product in your account shows as Uncategorized, Kintsugi cannot calculate the correct tax rate for that item. You should review your product list and assign the appropriate category as soon as possible. If you are unsure which category applies, the Kintsugi support team can help.

📌 Note: Miscategorized products are one of the most common causes of incorrect tax calculations. Keeping your product categories accurate is essential for compliance.

Need help?

For further concerns, we're always here to help. If you can't find the answer you're looking for, just reach out to us using the chat in the bottom right corner of your screen.