By Jennifer Dunn of TaxJar
Sales tax, like bookkeeping or handling income taxes, is one of those business administrative tasks that is not profitable, but still necessary. After all, no one starts a business because they are excited about filing a sales tax return!
Sales tax can prove to be a particularly steep learning curve for business owners for a few reasons:
- Sales tax is regulated at the state level, so there is no overarching set of sales tax rules that apply to every state
- Most sales tax regulations are written in legalese
- Sales tax rules and laws change all the time
At TaxJar, we hear some of the same basic questions over and over again, so I thought I’d answer them today.
#1 – Do I have to pay sales tax if I work from home?
Your business is a business, whether you work from your kitchen table or a penthouse suite overlooking the New York skyline. This means you should strive to keep your business legal and compliant, even if you work from home.
Most states require that anyone who sells taxable goods at retail collect sales tax on the first sale, from day one. (One notable exception is Tennessee, where sellers are not required to collect sales tax until they make $400/month or $4,800/year in gross sales.)
Your business is a legitimate business, and if you plan to grow and expand, you’ll want to make sure you follow all the rules and laws as you run an up-and-coming empire!
#2 – What exactly is taxable?
Not all businesses sell taxable items or collect sales tax. Most “tangible personal property” is taxable. This includes things you can hold and touch, such as jewelry or furniture. If in doubt, the item is probably taxable.
But in some cases, some items are taxable in one state but not taxable in others. For example, items of clothing individually valued under $110 are tax-free in New York. Another example is grocery items, which are tax exempt in most states, but not all Also, services such as graphic design or home repair are not taxable in most states, although some states, North Carolina as a prime example, are increasingly turning to taxing services as they look for new ways to generate revenue.
You can find out more about what is and isn’t taxable in your state from your state’s revenue department.
#3 – To which customers do I charge sales tax?
You only need to collect sales tax from customers in the state where you have sales tax nexus. “Nexus” is a fancy way of saying “significant connection” with a state. Each state makes its own rules and laws regarding nexus formation, but here are the main factors:
- you live there – You always have nexus in your own kingdom. If you’re a small business, you probably have a nexus in your home state
- You have a position there – Creates an office, store, sample room, warehouse or factory nexus
- You have staff there – An employee, contractor, sales person, installer, etc. creates the nexus
- You do temporary business there – Selling temporarily, such as at a trade show or craft fair, creates nexus in some cases. Each state is slightly different in how many days you must do business in the state to count as nexus
- You have an affiliate there – An “affiliate” in this case is someone who refers you business in exchange for a cut of the profits. Many states now consider partners to create nexus in states
When you’re just starting out, you likely have sales tax nexus in your home state. It’s only as you grow — like when you hire a remote employee in another state to help you with customer service — that you might find yourself collecting sales tax in another state. Periodically evaluate your business operations to ensure you are sales tax compliant.
#4 – How do I keep myself legal and compliant?
The most important way to keep yourself compliant is to register for a sales tax permit with your state (or states) before you collect sales tax. Most states make it illegal to collect sales tax from unregistered buyers. Regardless of your intentions, they see collecting sales tax without a permit as misrepresenting yourself to your customers.
Once you have a sales tax permit, your state will assign you a sales tax filing frequency. This is usually based on the amount of sales you make (or project to make) to customers in the state.
Once you have a filing frequency, note your sales tax due dates and be sure to file your sales tax return on time. Also make sure you file a sales tax return even if you didn’t collect sales tax in that state during the filing period. Most states will happily charge you a non-filing fee even if you have nothing to report or collect. It’s not fair, but it happens!
#5 – How much sales tax will I charge?
You’ve probably noticed that you pay slightly different sales tax rates from city to city. For example, in my city of suburban Atlanta, I pay sales tax of 6.5%. But if I go to town for shopping, I can pay 8%.
This is because while all states have sales tax rates, most of them allow local areas such as counties and cities to deal with additional sales tax rates. Many local governments finance a large portion of their budgets through sales taxes.
When you sell online, collecting the correct amount of sales tax can be difficult in a hurry. If you’re lucky, you live in one of the “origin-based” sales tax states and do nexus. This means, regardless of where your customer is located, you charge sales tax based on the tax rate in your location.
But the vast majority of states are “destination-based,” meaning you have to charge sales tax based on the ship-to address of your customer.
Additionally, if you have ties to more than one state, you generally must collect at the “destination-based” rate in any state that is not your state. It can be quite confusing and we call it our “
Fortunately, many online shopping carts and marketplaces will handle sales tax collection for you, although you’re ultimately responsible for making sure you’re collecting the correct amount of sales tax from your customers.
#6 – What do I do with all the sales tax I collect?
When your sales tax filing deadline rolls around, your next task is to figure out how much sales tax you collected from your customers in that state and then file a sales tax return.
Reporting how much sales tax you collected can be difficult in those destination-based states. State revenue departments want not only the amounts you collect from in-state buyers, but also the amounts you collect from counties, cities, and other special taxing districts. And most states have hundreds of jurisdictions.
Once your company is big enough to spend hours poring over zip codes and tax tables to fill out sales tax returns, it’s time to think about it. Sales tax automation.
A sales tax automation solution will connect to shopping carts and marketplaces where you sell, break down your ecommerce transactions and present you with a sales tax return-ready report. From there, all you have to do is fill out the form at your state’s Department of Revenue, or sign up to autofile your sales tax returns (so you never have to deal with them again!).
Another interesting fact about sales tax – some states realize that they are asking you to do a big job when it comes to collecting sales tax. Such states will allow you to keep a portion of the sales tax you collect as a sales tax discount. you can
I hope this post has answered your most common questions about sales tax. If you have more, please reply in comments or ask us “Sell Tax for eCommerce Sellers” Facebook Group.
About the author
Jennifer Dunn is the content lead for TaxJar, a service that manages sales tax collection, reporting and filing for more than 5,000 businesses. For more on sales tax, check out TaxJar Sales Tax 101 for Online Sellers Guide.