Whether you’re starting a new business or expanding into e-commerce, here’s what you need to know about your sales tax obligations.
What is sales tax?
Sales tax is a retail point-of-purchase tax imposed by state and local governments that is paid by the purchaser for goods and services. As a small business owner, you are required to assess sales tax, collect it and pass it on to the appropriate taxing agency within the correct time frame. Sales tax rates and laws vary from state to state – which often leads to confusion, especially if you sell to customers in more than one state (more on this below). Currently, Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon don’t impose general sales taxes at the state level. However, many localities in Alaska have their own local sales taxes.
What is a sales tax permit and who needs one?
In order to collect sales tax, your state may require you to obtain a sales tax permit.
How do you process money collected as sales tax?
Generally, states require businesses to pay the sales taxes they collect quarterly or monthly and some yearly. You’ll have to use a special tax return for sales taxes, and report all sales, taxable sales, exempt sales and amount of tax due. Not paying on time can result in penalties – A LOT of penalties. In Tennessee, if you fail to report your sales tax on time, they send you a “friendly” notice that includes a bill for $500.
What types of transactions are exempt from sales tax?
While you should check with your individual state as to which goods and services sold in your state are subject to sales tax (unfortunately, it varies a lot), generally you are not required to collect sales tax for the following transactions:
- Resold items – Retailers and resellers don’t typically have to pay sales tax on wholesale purchases since it’s assumed that the end consumer will pay sales tax on these items at the point of purchase.
- Raw materials – If you produce and sell goods that will be the raw material for other goods, these items are typically considered sales tax exempt.
- Non–profits – Sales made to non-profits are exempt from sales tax.
If you are involved in these types of transactions, you’ll need to get a copy of the buyer’s tax-exempt certificate or number (issued by the state).
Yes, it can be. With thousands of sales tax jurisdictions in the U.S., determining which sales tax rate to charge can be a challenge. If you operate an online business, it’s worth investing in online shopping cart services to handle sales transactions, many of which will automatically calculate sales tax rates for you. More comprehensive online sales tax solutions can also take care of the end-to-end process of calculating, collecting and filing sales tax return on your behalf.
- Forty-five states and Washington D.C. all have a sales tax. But every state is different – the exact laws that create sales tax nexus in one state may be a little different in another. This post lists all the states and a link to sales tax laws with the exact wording they use regarding what business activities create sales tax nexus.
Remember, if you have sales tax nexus (or if you have: Your home, A location, Personnel, Inventory, Affiliates, or do Trade shows, craft fairs, etc.) in a state that has sales tax, you need to:
Amy Psyhos is an Enrolled Agent and our Tax Resolution Manager. She personally assists potential and existing clients in having a better understanding of the resolution process. She evaluates each client’s financial information to identify available settlement options to best handle their IRS debt. As information is requested from the IRS, she gathers and prepares all of the necessary documents to ensure all IRS deadlines are met.