What are product tax codes in the US?

Navigating the world of product tax codes can be a bit tricky, but it's essential for businesses to get it right. These special codes help determine the correct tax rates for goods and services, ensuring compliance with US tax category codes.

If you’re using a payment processor or online marketplace, PTCs are even more important for you. If you don’t select the right tax codes, the tools won’t work correctly.

Want to dive deeper into how platforms like Amazon and Stripe use these codes – or how tax engines make PTC compliance easier for you? Or perhaps you're curious about real-world tax code examples that can help streamline your processes?

In this article, we’ll cover:

• What are product tax codes?
• How PTCs are used on different platforms
• Benefits of using correct PTCs
• Challenges in assigning correct PTCs
• US product tax code examples
• How to assign PTCs
• Other tips for business owners

What are Product Tax Codes?

Definition and Purpose of PTCs

Product tax codes are special codes used to figure out what tax rate applies to different goods and services in a specific jurisdiction. The codes play an important role in making sure businesses follow tax laws correctly. By using the right PTCs, companies can automatically apply the correct taxes when selling their products, helping them stay compliant with complicated US sales tax rules.

Why accurate tax codes are important

Using the wrong tax codes can lead to big problems for businesses, like paying fines or facing compliance issues. If a company makes errors in assigning these codes, they might collect the wrong amount of sales tax, causing trouble with state tax authorities. So, getting the right PTCs in place helps you avoid these risks and keeps your business running smoothly.

How Product Tax Codes Are Used in Different Platforms

If you’re googling about tax codes, it’s probably because you use some kind of platform, marketplace, payment processor, or tax software that is helping with your product sales – and you need to comply with US sales tax categories! Here’s how the different platforms use PTCs.

Tax Engines

Tax engines play a crucial role in automating tax calculations by leveraging PTCs. These engines act as intermediaries, accurately assessing and applying the appropriate tax rates based on the PTCs assigned to products and services. By integrating with various payment and e-commerce platforms, tax engines ensure that businesses comply with local, state, and international tax laws without manual intervention. These tools are indispensable for companies looking to streamline their tax-related operations and maintain compliance with rapidly changing tax regulations. Consider tools such as Quaderno, Avalara, and TaxJar – and determine which tax engine is best for your business.

Payment Processors

Payment processors are key players in online shopping, making it easy for buyers and sellers to do business. When they integrate product tax codes (PTCs) into their systems, some payment processors add the right tax during checkout. For example, you might select Stripe tax codes when setting up your account. When a customer buys something, the processor checks the PTC against the buyer’s location to figure out how much tax to charge, helping businesses follow local tax laws. The key is to make sure the payment processor actually offers tax calculations in all the jurisdictions where you sell. For example, Stripe Tax has very limited coverage. The other option is to integrate your payment processor with a more comprehensive tool like Quaderno.

Online Marketplaces

Online marketplaces like Amazon are important for businesses to reach customers worldwide. These platforms use product tax codes (PTCs) to take care of tax compliance for sellers, making sure each sale has the right tax based on what and where the product is. For example, when listing items, sellers must choose the right Amazon tax codes so that buyers pay the correct sales tax. PTCs have become even more important recently as online marketplace tax rules spread, such as the marketplace facilitator sales tax rules in the US.

Benefits of using correct PTCs

The benefits of correct product tax codes are closely related to why they’re so important – data accuracy and compliance. But there are also other forms of efficiency and time savings that can help you run a better business!

Automated Tax Calculations

Correct PTCs enable automated systems, such as tax engines, to accurately calculate tax rates based on local policies. Using automatic tax calculations in your checkout or point-of-sale system also saves you time and minimizes human error.

Streamlined Reporting

Accurate tax codes help generate accurate tax reports, which make it easier to track sales tax liabilities and simplify the preparation of tax returns. When you have trustworthy and well-organized tax reports, filing a tax return becomes a matter of data entry.

Reduced Compliance Risk

By assigning the correct PTCs, businesses reduce the risk of audits and penalties, as your calculations are more likely to comply with tax regulations.

Efficient Invoice Processing

With the correct tax codes, your team can process invoices more efficiently, as the tax amounts are automatically calculated and included. This speeds up both accounts receivable and accounts payable operations. If you use a tax engine for automatic calculations, make sure it also offers automatic invoices.

Improved Accuracy in Financial Data

Correct PTCs ensure that the financial data used for budgeting, forecasting, and strategic planning is accurate, leading to better decision-making. This is especially important for SaaS and other subscription-based businesses, whose recurring revenue informs short- and long-term business planning.

Scalable Processes

We’ve mentioned tax engines and automation a few times now. Automated systems that rely on correct PTCs can easily scale with your business as it grows, handling increased volumes of transactions without additional manual effort.

Time Savings

Here’s the ultimate benefit, in our experience. Automating your finances and tax compliance with correct PTCs reduces the time spent on manual data entry and corrections. This allows you and your teams to focus on more strategic tasks.

Challenges in assigning correct product tax codes

We have years of experience in helping online businesses comply with sales tax, and in our opinion, one of the greatest challenges for business owners is selecting the correct PTCs. Here are some of the most common challenges we have encountered over the years:

Diverse Product Offerings

Businesses with a wide range of products or services may find it challenging to categorize each item correctly, especially if the products span multiple categories with different tax implications.

Lack of Consistent Tax Guidelines

US tax code categories vary across states and sometimes even city or county lines. The lack of clear and uniform guidelines for determining the tax codes can lead to misclassifying products and mischarging sales tax. Businesses selling in multiple states must navigate various local-level requirements, each with its unique set of tax codes.

Frequent Updates and Changes

Your own tax codes need to be regularly updated to remain compliant with current laws and US tax code categories. Keeping track of these and ensuring they match the current guidelines can use up a lot of time and resources.

Limited Resources

Small businesses, in particular, may lack the resources or expertise to efficiently manage and assign the correct PTCs, leading to errors and potential compliance issues.

Integration with Technology

Ensuring that tax codes are correctly integrated into tax engines, payment processors, and other software systems requires technical knowledge and can pose integration challenges.

US product tax code examples

The actual product tax codes you use will vary from state to state and sometimes platform to platform. But PTCs refer to specific product tax categories, which remain pretty consistent.

Here are examples of common US tax code categories:

• Tangible goods
• Services
• Electronically Supplied Services
• Software (business use)
• Software (personal use)
• Downloads
• Nontaxable

Product tax categories and their PTCs get very complicated when it comes to digital products! There are many caveats and variations in the tax policy and the terms used – depending on whether it’s for business or personal use, whether it’s streamed or downloaded, whether it’s a subscription or a one-off purchase, etc.

It can be difficult to know how to categorize your products and services. Learn more about the tax categories of digital products.

How to Assign the Correct Product Tax Codes

Here’s how to assign the correct product tax codes for your business in 4 steps:

1. Identify all of your products
2. Research the applicable tax codes
3. Classify and assign codes
4. Verify and review

1. Identify Your Products

Start by making a complete list of every product and service your business offers, so you don't miss anything when assigning tax codes. Organize these items by categories like product type, industry, or purpose to make it easier to find the right tax code for each one.

2. Research Applicable Tax Codes

Use reliable sources to find the right tax codes for your products, like the IRS guidelines, state tax websites, or industry tax guides. It's a good idea to talk to tax professionals who can give you specific advice and help ensure your business follows the rules.

3. Classify and Assign Codes

Use a simple method to match your products with the right tax codes, making sure each item or service is correct and compliant. For example, you might have product groups for clothing items, digital products, and food items. First assign the group with usual tax codes, then consider any specific exemptions or niche tax rules.

4. Verify and Review

Regularly check the tax codes you've assigned to keep up with any legal changes or shifts in product categories. To ensure everything stays accurate, you can use handy tools and tax software that can help verify these codes and alert you to any relevant policy updates.

What next?

If you’re curious how a tax engine can help you automatically comply with sales tax and stay on top of tax policy changes in the US, give Quaderno a try. Our tax compliance software is designed to help business owners like you. Start a free trial today or, if you think you need a special solution that’s customized to your business, book a call with one of our product specialists.