Small business sales taxes can feel overwhelming. Sales taxes exist in most states, but how do you register for them? And how do you know how much you need to pay the state? When are your taxes due? In this guide, we’ll walk you through the essentials of sales taxes for small businesses.
Sales tax is an unavoidable part of small business (in most cases).Sales taxes are taxes levied by state governments, and the proceeds go toward a large number of state projects. Typically, sales taxes are added to the purchase price at the point of sale for most tangible products and services. Businesses are required to collect these taxes from consumers and pass them on to the state.
As a small business owner, you’ll probably be expected to help the state collect those sales taxes.
Sales taxes are a common component ofsmall business taxes, and there are a few general steps you’ll need to follow to fulfill your sales tax obligations. Let’s walk through them.
The vast majority of states require a sales tax: forty-five states, to be exact. Currently, only five states don’t have a statewide tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. That said, Alaska and Montana allow their cities and counties to leverage local sales taxes even though the state doesn’t charge one. Similarly, many states that have a state sales tax allow their cities and counties to charge a local rate on top of the state rate.
It’s important to check what the requirements are in your area. And if you’re operating in multiple locations, you’ll be responsible for each.
In general, states charge sales taxes for personal property items and certain services that are sold to the final consumer. That said, certain types of products or services might not be subject to sales taxes, or they’re taxed at a different rate. For example, some states don’t charge taxes for essential groceries like milk, eggs, and so on, but processed foods are subject to taxes. Some states even regard professional services like dentistry or law as tax-free while personal services like lawn mowing and pet grooming may be taxable sales.
Be sure to assess which of your goods or services will be classified as nontaxable sales according to your state’s laws.
In the past, states were only concerned about retail sales that happened within their borders in physical locations. But as e-commerce sales across state borders became more prevalent, states lost out on lots of potential revenue. So, in the case South Dakota v. Wayfair, the Supreme Court ruled that states could require remote sellers to collect revenue for their taxable sales. This is known as salestax nexus. If you regularly make online sales, you’ll need to collect taxes for each state where you have nexus.
This is a little complicated, though. Each state has slightly different terms for what constitutes having a taxable nexus in its jurisdiction. But generally speaking, you have nexus in a state where you have a physical presence, have employees, or if your annual sales meet a certain threshold (usually pretty high).
If you’re not sure whether you have economic nexus, we highly recommend chatting with an attorney in the state you’re not sure about. They’ll help walk you through their state’s policies to see if you qualify for state sales taxes.
Most states require businesses that have a taxable nexus — regardless of their business structure — to apply for a seller’s permit before collecting the tax. You can typically find a sales tax permit application on your Department of Revenue’s website. You’ll need to request a permit in every state where you have a sales nexus.
It’s also important to note that, in some states, you might encounter slightly different versions of seller’s permits. For example, Utah has a temporary sales tax permit for special events. South Carolina offers a similar permit for artists who make sales at craft fairs. Ultimately, you’ll need to check the registration process in each state where you’ll be conducting business.
Determining your sales tax rate can feel a little overwhelming at first because there are several factors that go into it. For starters, you’ll need to know your state’s base tax rate. This rate can range from as little as 0% to 7% or higher. On top of that, you may have local taxes to handle. You’ll need to determine what your state (and municipality, if applicable) rate is.
Also, remember that certain goods or services may be exempt from taxes or taxed at a different rate. By making sales tax calculations for both your state and local rates, you can determine what your total rate will be. If you’re unsure, consult a local tax attorney or your state tax authority for more information.
Anytime you make a sale — whether online or in person — you’ll need to collect sales taxes. Thankfully, you can add the tax onto the total amount the customer pays; you don’t have to pay it out of pocket. Many small business owners find it helpful to use point of sale software like Square or Stripe to automatically calculate sales taxes.
For each transaction of a qualifying good or service, you’ll charge the tax. No exceptions.
After you collect the tax revenue, you technically hold onto the funds for a little while. You’ll only send the tax revenue to your state agency when you file your sales tax return.Since there’s a delay between when you collect sales tax and when you transfer it to the state (more on that in a moment), it’s important to keep careful purchase records. Track how much tax revenue you’ve acquired from each sale, the type of product involved, how much goes to the state, how much goes to your municipality, and so on. A lot of small business owners use a bookkeeping tool like ZenBusiness Money, Quickbooks, or another accounting software to help track their sales tax amounts.
You don’t hold onto sales tax revenue indefinitely. You’ll eventually pass that money onto the state. Here’s how.
Every state works a little differently when it comes to paying sales taxes. Some states require high-volume sellers to pay their sales taxes weekly or monthly. Other states allow sellers to pay on a quarterly or even annual basis. You’ll have to check with your state’s revenue department to learn what requirements are in your area.
Additionally, learn where you should send your sales tax money. You might be able to send the money electronically or by check or money order. It all depends on your state’s policies.
Once you know how and when to send your sales taxes to the state, it’s your responsibility to do so every time a return is due. Many states offer an online filing option to help streamline your return. In fact, some states actually require online filing if you have a high sales volume. Check your state sales tax laws for more information.
If you prefer, you may also be permitted to file a physical return instead. Whatever method you choose, be sure to file your return carefully and on time.
There are a few circumstances where you might not need to collect and pay sales taxes. As we mentioned earlier, certain items like groceries or other essentials might not be subject to sales taxes. If you run a business that sells exempt goods, be sure to keep careful track of them.
Additionally, many states offer sales tax exemptions to qualifying nonprofit organizations. Often, these groups will apply for a sales tax exemption certificate from the state. They’ll need to show it to each business they purchase from to be exempted from sales tax. On a similar note, some states offer reseller’s permits (another type of sales tax exemption). A resale certificate allows a business to make tax-exempt purchases on the condition that they’re buying the (usually) taxable items to sell again or to manufacture into something else.
When checking information about sales tax exemptions, remember that sales taxes aren’t handled by the federal government. Instead, they’re administered at the state level. So tax policy will vary significantly from state to state.
Each state has different consequences for failing to collect sales taxes. In some, you’ll face penalties and late fees. Some states will even revoke your sales tax license if you don’t collect tax (or file it outside the filing period too many times). For more information, we highly recommend consulting with your state’s Department of Revenue or Office of the Comptroller.
Running a compliant business doesn’t have to feel like a solo endeavor. Here at ZenBusiness, we love to tackle the red tape side of business so small business owners are empowered to pursue their goals. Whether you need help managing your finances,calculating your sales taxes, or evenstarting your first LLC, we can help.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
At the time of this writing, California’s statewide sales tax is 7.25%. That said, California allows its districts to impose additional local sales taxes ranging from 0.1% to 1%. So depending on the location of your sales, your sales taxes might be as high as 8.25%. Often, e-commerce businesses are subject to these taxes, too.
You’ll remit sales taxes to your Department of Revenue on a set schedule (or at minimum, file a return if you have no tax due). Every state varies a little bit, so check with your state agency for full details.
Technically speaking, no. Consumers usually pay sales taxes; businesses are responsible for collecting the taxes and passing them along to the state. That’s why certain organizations can make tax-exempt purchases with a resale form (rather than the other way around with certain businesses being exempt from charging taxes).
In this sense, sales taxes are different from excise taxes, since excise taxes are levied on businesses. For more information, check out our excise tax guide.
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