Sales Taxes: The Ultimate Guide for Small Business Owners

How to Collect, Report, and Pay Sales Tax

  1. Determine if your product or service is subject to sales tax
  2. Register for a sales tax permit
  3. Calculate the sales tax rate that you must charge
  4. Collect the sales tax at your point of sale or checkout cart
  5. Send sales tax return and payment to the state

Sales tax is one of many types of small business taxes that entrepreneurs are creditworthy for paying. forty-five states and Washington D.C. all have sales tax. States use this money to pay for budget items like schools, roads, and public safety .
Businesses that sell a product or a taxable service must collect sales tax from their customers. The processes of calculating the correct sales tax rates, collecting requital, submitting sales tax returns, and paying the tax can be very time consume, particularly for first-time business owners. This is particularly so if you sell multiples types of products or operate on in multiple states .
To help you sort things out, we ’ ll cover the steps involved in collecting, report, and paying sales tax. We ’ ll starting signal out by helping you figure out if your product or service is subject to sales tax. After reading this, you should feel much more confident in reporting and paying your sales taxes .

Collecting, Reporting, and Paying Sales Tax

Step 1: Determine if your product or service is subject to sales tax.

State laws vary pretty significantly in terms of which products and services are subject to sales taxes. If you sell merely in Alaska, Delaware, Montana, New Hampshire, or Oregon, then you do not have to pay statewide taxes, though Alaska and Montana allow localities to charge sales tax.

generally, retail items like handbags and clothes are subject to sales taxes. Prescription drugs and food items normally are excuse from sales taxes, though the rules vary from state to submit. Things get more complicate if you sell items online or digital items .
If you sell a taxable product or service, you must pay sales tax in any express where your business has a “ tax nexus. ” For example, you can establish a link by operating a physical storehouse in the express, employing one or more individuals in a state, or exceeding a finical sales book in a state of matter .

Sales Taxes for Online Sellers

many on-line sellers have to pay sales tax in the wake of a 2018 Supreme Court decisiveness, South Dakota vs. Wayfair. In this case, the Supreme Court decided that states can require on-line sellers to charge and collect sales tax—even if the seller doesn ’ deoxythymidine monophosphate have a store or other forcible bearing in the state of matter .
After Wayfair, 24 states require ecommerce sellers to collect and pay sales tax. [ 1 ] fortunately, most of these states exempt on-line sellers that process fewer than 200 internet transactions or $ 100,000 in sales each year .

Sales Taxes for Digital Products

Sales tax laws have had to evolve as internet streaming becomes more democratic, and more and more people consume media and television on-line. The majority of states now tax digital download. [ 2 ] These include items like downloadable books, ecourses, and digital music files .

Sales Taxes for Services

traditionally, only palpable products were national to sales tax. however, many states now tax services to fill up their tax coffers. by and large, professional services like aesculapian services and legal services are excuse. personal services like hair salons, favored training, and lawn care are typically capable to sales tax .
If you are confused about whether your product or service is taxable, it ’ s a good idea to contact your express ’ sulfur tax agency or department of tax income .

Step 2: Register for a sales tax permit.

Before you can collect sales tax, you must register for a sales tax permit in each submit where you have a taxable nexus. If you do business in multiple states, you ’ ll necessitate to register in each of those states. In most cases, this can be accomplished for free on each express ’ s department of gross web site. You ’ ll need basic business data, such as your employer identification number and business address, to register. At the end, you ’ ll receive a sales tax ID that you should use when reporting your sales tax .

Step 3: Calculate the sales tax rate.

At the beginning, the sales tax rate that your party must charge depends on where you sell. If you sell in multiple states, you ’ ll need to calculate and collect the tax in each of those states.  
The majority of states have destination-based sales tax. This means that the sale is considered to take position wherever the buyer uses the product. For exemplify, let ’ s say you have a store that ’ s based in New York, but you ship an item to a customer who lives in New Jersey. You must calculate and charge the customer the New Jersey sales tax ( in addition to any local sales tax ). You ’ d besides have to file a New Jersey sales tax return .
A handful of states are origin-based sales tax states, which means that the sale is considered to take place in the state of origin, even if you ship the detail somewhere else. [ 3 ] California has a loanblend lineage and destination-based sales tax law .

Step 4: Collect the sales tax at your point of sale or checkout cart.

To make sales tax calculation easy, try point of sale software like Square. Thanks to Square ’ s integration with TaxJar, all you need to do is input the locations where you sell, and the app will calculate the correct express and local sales tax rates .
Whether you choose to use a polonium or make your own calculations, you ’ ll necessitate to display the sum of sales tax individually from the buy price of the item. Square is set up to show sales tax on a divide tune in the receipt .

Step 5: Send sales tax return and payment to the state.

The last footfall is to submit your sales tax return to the department of state, along with the actual payments you ’ ve collected from customers. If you use accounting software like QuickBooks, you can set it up to have sales tax payments automatically post to a separate report.

due dates for filing sales tax vary a set based on which express you transact in. The deadline normally falls on the 20th or 25th day after the coverage period ends. Some states require you to report and pay sales tax each month, whereas others are on a quarterly or annual cadence. Often, the report and payment schedule is more frequent for higher volume sellers. fortunately, most states make it possible to report and pay your taxes on-line .
flush if you have no transactions during the report menstruation, you should still submit a sales tax reappearance in any state where you have a tax allow. failure to do indeed can result in a ticket or even having your sales tax allow revoked .
Remember to find out your state ’ second deadlines, and stick to them. About half of the states with a sales tax will let you keep a small share of the sales tax collected when you pay on time. This sum is generally alone 1 % -2 % of the sales tax you collected, but it ’ s loose money ! [ 4 ]
If you don ’ deoxythymidine monophosphate want to remember deadlines, consider enrolling in an automatize tax file service, such as AutoFile from TaxJar. They will file your sales tax returns for you on time for a monthly subscription fee .

Sales Tax Myths and Misconceptions Explained

now that you know the basics of sales tax collection, calculation, and report, don ’ metric ton get these myths trip you up .

Myth #1: The IRS will audit me if I don’t collect sales tax correctly.

many little clientele owners think their business will face an IRS audit if they don ’ metric ton collect sales tax correctly. In fact, the IRS has nothing to do with sales tax ! The IRS is our home tax administration, but sales tax is governed at the state level. There is no national sales tax in the U.S .
rather of contending with the IRS, if you have sales tax questions or problems, you need to deal with the state of matter ’ s taxing authority. This authority is generally called the State Department of Revenue, but it can go by other names. California ’ s taxing assurance, for exemplar, is called the California Department of Tax and Fee Administration .

Myth #2: I only sell online, so I don’t have to collect sales tax.

Internet sales are like to other types of products after the Supreme Court Wayfair lawsuit. If you sell taxable items and have “ sales tax nexus ” in a department of state ( more on that concept below ), then you are required to collect sales tax from your buyers—no matter if you made the sale face to face or on-line. That said, most states require on-line sellers to pay sales tax alone if they do over a certain total of transactions or gross .
Before you start collecting sales tax, you ’ re required to register for a sales tax license with your state of matter ’ sulfur department of gross .

Myth #3: I only have to collect sales tax from buyers in my home state.

This is one of those myths that can be true, but there ’ s often more to it. Long fib brusque, in the U.S., on-line sellers are merely required to collect sales tax in states where they have a sales tax link. “ Nexus ” means a meaning association to a department of state .
You constantly have nexus in your home state—even if you merely work from your kitchen table—but other coarse business activities might give you link in other states. These activities include having an employee, forcible location, salesperson, installer, or contractor in a particular country, or even just storing stock in a state. You can read more about the definition of nexus here .

Myth #4: If I didn’t collect sales tax, I don’t need to file a sales tax return.

This is another myth that can end up costing you money. If you hold a sales tax allow in a state, then you should always file a sales tax tax return on your due date. That ’ s even if you didn ’ triiodothyronine collect a penny in sales tax .
States use your sales tax return to figure out if you ’ re inactive in clientele. If you don ’ triiodothyronine file a sales tax render, most states have some shape of penalty. Some states might fine you up to $ 50, while other stays might cancel your sales tax license if you continue to miss file deadlines .

Myth #5: I should charge sales tax on everything I sell.

In a arrant world, sales tax would be simple. But in many states, some items considered to be “ necessities ” —like groceries, clothing, and even textbooks—are either not taxable or taxed at a different rate. For example, groceries are tax loose in Kentucky but taxed at a reduce pace of 1 % in Illinois. Clothing is tax free in Pennsylvania but taxed at the normal rate in Arkansas. Be certain that you ’ re charging the right sales tax rate for your product or military service. Your point of sale software or an automatize sales tax filing service can help with this ( If you have questions about what is taxable and what isn ’ deoxythymidine monophosphate, you can constantly contact your department of state ’ randomness department of gross. )

Sales Taxes Demystified

Calculating, collect, and reporting sales taxes can be a pain, but ultimately, sales taxes go towards a estimable causal agent. These taxes are what fund state and local budgets and pay for schools, roads, arouse prevention, and other important issues .
indicate of sale software, like Square, and sales tax filing services can take some of the headaches out of sales tax solicitation and coverage. And once you ’ ve been in business for a match years, sales tax report will become second nature .
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