One of the most complicated aspects of a small business to navigate is taxes, including sales tax. Increasing this challenge is the fact that different types of products each have unique sales tax rates depending on their classification. This is why many ecommerce companies have misclassified products that lead to incorrect sales tax calculations. Here are some reasons why and what you can do about it.

Potential Complications of Misclassification

Companies that misclassify their products and charge the incorrect sales tax may face customer complaints and serious problems if an audit occurs. It can also result in time-consuming efforts to recalculate the additional sales taxes owed. Whether the problems that arise are with the tax authority or customers, they can be costly

With the potential complications of misclassification in mind, take a closer look at some of the most common classification categories and the likely problems that arise within each of them.

Frequently Exempt Classifications

Although every state has slightly different rules for sales tax, there are common themes when it comes to exemptions. Many of these exemptions do not apply to the typical ecommerce website, although you should be aware of them in case they are relevant for your small business. Common exemptions include:

  • Products for resale, such as inventory
  • Raw materials for resale
  • Intangible property, such as software
  • Agricultural products
  • Prescription drugs
  • Food, particularly unprepared items

For example, in Connecticut footwear under $50 is tax exempt, as is certain computer hardware sold to teachers in Ohio. Despite these specific situations, it is more common to have services exempt from taxation than goods. While the most exempted services include medical care and legal support, it is rare for an ecommerce store to have service-related exemptions.


Clothing is a gray area that changes not only in each state, but also at different times of the year. You must first determine if your state takes part in the Streamlined Sales and Use Tax Agreement (SST), making clothing either exempt or taxable. This agreement includes strict definitions for clothing.

SST member states provide an advantage since they must have a taxability matrix that outlines the treatment of clothing and related items. In the case of states where clothing sales are not exempt, look for special taxation rules related to specific accessories or clothing, including recreational or luxury clothing. Some of the non-SST member states that exempt clothing only up to a specific threshold.

Additional classification complications can occur from phrases like “everyday” clothing that determine whether clothing is taxable or exempt. In this case, an ecommerce store selling sweatpants would have to determine if those are “everyday” clothing or “athletic wear,” which are taxable and not taxable, respectively.


As an ecommerce website, you are more likely to sell unprepared food than prepared food, but you should still be aware of the various classifications, as well as sub-classifications. Often, unprepared foods fall in the exempt category while taxes apply to prepared foods. As an ecommerce company instead of a brick-and-mortar, pay attention to specific taxation rules on food items since many of the food-related tax laws focus most on stores with physical addresses.

In some states, this will help you avoid complications. For instance, in Massachusetts, the Department of Revenue charges tax on both pizza and cans of soda at a restaurant if the customer dines in but only on the pizza when dining out.

Luxury Goods

Luxury goods are often subject to special taxes. Items like alcohol, high-end autos, tobacco, and jewelry typically classify as luxury goods. From an ecommerce perspective, it is essential that you recognize whether your product qualifies as a luxury good, as this will increase the tax you collect on it. While many items considered luxury goods meet the definition, not all do.

Ensuring Your Products are Properly Classified

The specific classification of your product directly impacts the amount of taxes you pay on sales. As an ecommerce company, you must be aware of this and take the appropriate precautions to ensure that you classify all your products correctly. Otherwise, you may face a decline in reputation or legal problems in the form of back-taxes due.

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