If you sell goods or services, you may have to collect sales tax from buyers or clients. But determining the amount to collect isn’t always easy. Each taxing authority sets its own rates and rules for when sales tax applies. Here’s a quick guide to how to handle sales tax for your business.
When Do I Collect Sales Tax?
Generally, you collect sales tax whenever you sell something in a state or municipality that requires the collection of sales tax. Not reporting and paying sales taxes can result in penalties and interest for back taxes.
Some states have no sales tax. Those include:
- Hawaii (which has a general excise tax)
- New Hampshire
That may not mean you’re totally off the hook if you sell in these states, though. Local municipalities may collect sales taxes that you need to apply.
What Goods or Services Are Taxable?
Each state has different rules for what goods or services are taxable. Some states, for example, don’t collect sales tax on food or other necessities. Others collect sales tax on everything, including professional services performed. Shipping is currently taxable in most states as well. Check your state’s sales tax laws to determine whether or not your goods or services are taxable.
What If I Sell in Other States?
Many businesses today—especially e-commerce businesses operating online—commonly sell goods or services across state lines. But, if you do so, do you have to know the sales tax laws of that state and collect tax accordingly?
The answer to this is somewhat muddled right now. Prior to 2018, if your business had a physical presence in a state such as a store, office, or warehouse—called a “nexus”—then you had to collect sales tax. But if you didn’t have a nexus, then you weren’t required to collect.
That all changed with a Supreme Court decision in June of 2018 (South Dakota v. Wayfair, Inc.) that said states could require businesses to collect sales tax for cross-state sales. South Dakota law, for instance, requires any entity with a minimum of $100,000 in sales or 200 individual transactions within the state to collect sales tax. Other states, which are currently losing millions of dollars in tax revenue from internet sales, are lining up to do the same.
How Do I Collect Sales Taxes?
First, most states require that you register for a sales tax permit that establishes your authority to collect and remit sales tax. Next, of course, you begin to collect taxes on your sales. Since each state has different rules for what goods or services are taxable, you will need to know what applies in your state.
If you sell large quantities or dollar amounts across state lines, you may need to become familiar with the applicable laws in those states and apply them to your sales. Another solution to this issue, particularly for e-commerce businesses, is to use an electronic shopping cart that incorporates sales tax calculation into each transaction. But while a shopping cart will calculate the taxes for you, you still have to report and pay the appropriate taxes to each government entity yourself.
Note that, if Amazon sells your products directly, sales taxes are automatically calculated and paid for you, but this doesn’t apply if you use Fulfillment by Amazon (FBA) services. Sales tax software programs such as TaxJar can also help you to organize your sales tax collection and payment process.
How Do I Pay Sales Tax?
Submit sales tax you collected to each state government in which you had qualifying sales. You will need to report and file sales taxes on either a monthly, quarterly or annual basis, depending on the state. Most states require you to file a tax form even if you collected no tax during the reporting period. States will generally forward any local tax to the taxing authority that gets it, so you don’t have to worry about paying a bunch of separate municipalities.
Sales tax calculations and payments can be confusing at best. The assistance of an experienced tax accountant can help to smooth the road and make sure you don’t encounter any surprises, like back taxes and penalties.