Many small business owners contend with collecting, reporting, and paying sales tax. Although there is currently no federal sales tax, 45 states, and many localities, as well as the District of Columbia, have a sales tax. Different taxing authorities have their own regulations, tax rates, exemptions, and deadlines, which can be quite confusing, especially for entrepreneurs who have just started a new business. There are several key points to keep in mind.
Is your product or service subject to sales tax?
Unless your business is located in Alaska, Delaware, Montana, New Hampshire, or Oregon, which do not have a state sales tax, it is important to find out which products or services are subject to sales tax in your state. Keep in mind that there may still be local sales taxes in states that do not have a state sales tax.
- Although there is substantial variation among state laws, products (i.e., retail items such as furniture, cars, books, computers, etc.) are typically subject to sales tax. However, items considered to be necessities, such as food, medicine, or clothing, may be exempt from sales tax, or subject to a lower tax rate.
- Certain services are often subject to sales tax as well, although the law varies from state to state. Services related to the repair or maintenance of personal and real property, personal services, such as pet grooming, hair salons, and dry cleaning, and business services, such as advertising or human resources, may be taxable. Some professional services, such as medical care or legal services, are often exempt from state sales tax.
- Wholesale items that will be resold and raw materials that will be incorporated into a product that will be produced for future sale may be exempt from state sales tax.
- Sales to federal, state, or local governments or their agencies are typically not subject to sales tax.
- Sales to nonprofits, charities, religious organizations, or educational institutions are usually exempt from sales tax.
What about out-of-state sales?
Businesses that sell products or services that are taxable must collect and remit sales tax in each state in which they have a “tax nexus,” that is, a sufficient connection to the state, such as a physical store in the state, employees working in the state, or a certain volume of sales inside the state.
Online sellers used to be able to avoid collecting sales tax in states other than their home state on the basis that they did not have a physical presence in those states. However, in a 2018 case called South Dakota v. Wayfair, Inc., the U.S. Supreme Court decided that states can impose an obligation on out-of-state online sellers to collect and remit sales tax if they have a “substantial” nexus with the state, such as economic or virtual contacts, even if the seller does not have a store or other physical presence in the state. Since the Wayfair decision, many states have passed laws requiring online sellers to collect and pay sales tax. Fortunately for small business owners, these new laws typically include exemptions for smaller online sellers, for example, those with less than $100,000 in sales or fewer than 200 internet transactions per year.
What are the filing requirements?
If you need to collect and remit sales tax, you must register for a sales tax permit with the state department of revenue. You must register in each state where you have a “taxable nexus,” including those where you sell goods online. In addition, you need to periodically file a sales tax return for each state where you must collect and remit sales tax.
How should sales tax be calculated?
If you have a traditional retail store with one physical location, you simply need to use the same local rate for each sale. It becomes a little more complicated if you ship goods to other locations inside or outside of the state in which your business is located.
Most states levy sales tax on a destination-of-sale basis, which means that you must collect any state, local, or county taxes based upon the rates at the address of your customer or where the product is shipped. Some states instead levy sales tax on an origin-of-sale basis, that is, any county and local sales tax is based on the address of your business.
Different rules may apply to in-state and out-of-state businesses. Most states require out-of-state sellers to collect sales tax at the destination-of-sale rate, even if they have an origin-of-state basis for in-state sellers. If you sell taxable products or services in more than one state, you will need to calculate, collect, and remit sales tax in accordance with the requirements imposed in each of the states.
When should sales tax be remitted to the state?
The frequency with which you must remit sales tax to the state will vary, usually depending upon the volume of the business's sales. Businesses with a high volume of sales typically need to remit sales tax on a monthly basis, and other businesses are required to remit on at least a quarterly basis.
We can help
Figuring out a business's responsibility for collecting and remitting sales tax can be quite confusing for many business owners, especially those who are just starting a new business. If you make a mistake or fail to remit sales tax on time, your business could be subject to large fines or even lose the right to do business in a state. As experienced business law attorneys, we can provide the guidance you need to ensure that you comply with your sales tax obligations. Please call us today to set up an appointment.