There is a lot to manage when you’re running a small business, but one of the most important things to take care of is managing the books. In addition to understanding what money is coming in and out of the business on a day to day basis, you’ve also got to be sure you’ve got things set up correctly for collecting and paying taxes.
Sales tax is probably one of the most confusing transactions that occurs, mainly because there’s a lot of gray area for those that run small businesses or sell online.
Sales Tax Defined
Sales tax is money collected at a retail’s point-of-purchase and is imposed by both state and local governments. It’s paid by the individual that is making the purchase, but that means as a small business owner you’re responsible for the following:
Figuring out the amount of sales tax that should be paid
Collecting the sales tax from the person purchasing from you
Turning over sales tax to the appropriate authority by the deadline outlined
Sales tax rates vary from state to state, which can lead to some confusion if you sell in more than one state or if you sell online.
Do You Need a Permit?
It depends on what your state requires. The best way to answer this question and many more for your specific state is to access state tax resources.
Not sure where to find your state requirements. You can look them up here.
How To Collect & When to Pay
You’ll need to check with your specific state for all the details but the general process of collecting and paying sales tax is as follows:
- You’ll record and report all sales, whether they are taxable or exempt, and the amount of tax due.
- You’ll submit a special tax return for sales taxes – usually states require small businesses and online shops to pay sales taxes quarterly and sometimes even monthly.
- Not paying on time means that you’ll be subject to late fees. Checking out the requirements for your specific state and/or consulting with a tax specialist or CPA is the best bet for making sure your system for collecting sales tax is in compliance with government requirements.
Sales that are Tax Exempt
You may have noticed that we mentioned in section above exempt sales and you may be wondering what all that involves. Although there may be exceptions, the general rules for tax exempt sales is as follows:
Resold items – retailers don’t typically have to pay sales tax on wholesale purchases since it’s assumed that the end consumer will pay sales tax on them at the end point-of-purchase. That said, many states require that you have a wholesale license, so you’ll need to check into the requirements and how to apply for one for your specific state.
Non-profits – sales made to non-profit organizations are also exempt
Raw materials – if you selling goods that will be made into other goods, they’re most likely considered raw materials and are typically tax exempt as well.
Selling Online & In More Than One State
This is where things can get a little tricky. If you sell online, your customers can live virtually anywhere and what state exactly is the sale made in? And what state’s rules do you’re follow – your state, or the state that you’re buyer lives in?
The first thing you need to determine is where your business has a physical presence. Wherever your store, office, warehouse, employees, etc. are you most likely have physical presence, also known as nexus.
You MUST collect sales tax for your nexus.
If you do not have a presence in a state then you are not required to collect sales taxes. To make sure you’re applying the rules for nexus correctly, make sure you check the requirements for the states that you have physical presence in.
Sales Tax Rates for Selling Online or Out-Of-State
Once you know that you need to charge sales tax, it’s time to determine what rate you should charge. It sounds a little overwhelming to manage due to the thousands of sales tax jurisdictions in the United States.
Our best advice for those that sell online or have a large volume of out-of-state sales is to invest in online shopping cart and sale transaction software because many automatically calculate sales tax rates for you.
Now that you’ve got the details on sales tax, what questions do you have for us? We’d love to hear them in the comments.
Ben Sutton is the founder of Mazuma USA, an accounting firm providing tax, bookkeeping and payroll services to small businesses. Since founding Mazuma, Ben has established himself as an expert in the small business world. He’s still driven by that same desire to provide accounting help to all small businesses – from photographers, bloggers and creatives to lawyers, doctors, and dentists, everyone needs affordable accounting help. Ben is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants. But Ben considers his greatest achievement and credential to be his happy wife and four children.