Sales tax is a complex and critical part of doing business in the United States. Rates can vary by state, county, and even city, and the rules about what is taxable are often complicated. To simplify this, Dappr Sales includes an automatic tax calculation feature that helps you charge the correct sales tax on your invoices.
This guide explains how the feature works, when it applies, and the important considerations you need to keep in mind to remain compliant.
How it works
Dappr's automatic tax calculation feature is designed to determine the correct sales tax rate for a sale based on the customer's location. This feature is enabled by default on all quotes, invoices, and recurring invoices.
For the system to work, two conditions must be met:
The customer's profile must include a full billing address, including a ZIP code.
Your company must be registered to collect sales tax in that customer's state.
When these conditions are met, Dappr will automatically calculate the appropriate state and local taxes for the sale and add them as a line item to the invoice. You can disable this on a case-by-case basis using the "Collect tax automatically"toggle in the invoice or quote editor.
How tax is calculated for different documents
Quotes and Invoices: Sales tax is calculated in real-time as you add items to the document.
Recurring Invoices: For subscriptions, sales tax is calculated fresh each time a new invoice is generated from the recurring profile. This is important because tax rates can change, or you may become registered in a new state between billing cycles. This dynamic calculation ensures each invoice is accurate at the time it is issued.
Tracking and remitting collected taxes
When you collect sales tax from a customer, that money does not belong to your business. You are holding it in trust for the state government, and you must remit (pay) it to the state on a regular basis.
Dappr helps you keep track of these obligations. You can view the total amount of sales tax you have collected and owe for remittance, broken down by state, by navigating to Sales > Taxes.
If you have engaged Dappr to handle your tax filings, the sales tax you collect may be automatically moved into a reserve account to ensure the funds are available when your payment to the state is due.
Is your product taxable?
While Dappr can calculate the correct rate, it does not determine whether your specific product or service is taxable in a given jurisdiction. This is a critical distinction that you are responsible for.
Sales tax laws vary significantly from state to state. For example:
In California, most physical goods are taxable, but most services (including Software-as-a-Service) are not.
In other states, services and software may be fully or partially taxable.
Before relying on automatic tax calculation, you must know if the items you are selling are subject to sales tax in your customer's state.
If you are selling a non-taxable item (like a consulting service to a client in California), you should disable the "Collect tax automatically" feature for that invoice to ensure you do not incorrectly charge your customer sales tax. If you are unsure about the taxability of your products or services, it is essential to consult with a tax professional.