By Jennifer Dunn of TaxJar
Sales tax, like bookkeeping or handling income tax, is one of those business administrative tasks that isn’t profitable, but is still necessary. After all, nobody starts a business because they’re excited about filing sales tax returns!
Sales tax can prove to be an especially steep learning curve for business owners for a few reasons:
- Sales tax is governed at the state level, so there’s 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 time and time again, so I thought I’d answer them for you today.
#1 – Do I have to charge sales tax if I work from home?
Your business is a business whether you work from your kitchen table or a penthouse suite in the New York skyline. That means you should strive to keep your business legal and compliant, even you work from home.
Most states require that anyone selling taxable products at retail collect sales tax from day one, on the very first sale. (The one notable exception is Tennessee, which doesn’t require sellers to collect sales tax until they are making either $400/month or $4,800/year in gross sales.)
Your business is a legitimate business, and if you plan on growing and expanding, you’ll want to make sure you’re compliant with all the rules and laws that go along with running an up-and-coming empire!
#2 – What exactly is taxable?
Not all businesses sell taxable items or are required to collect sales tax. Most “tangible personal property” is taxable. This includes things you can hold and touch like jewelry or furniture. When 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, clothing items individually priced at under $110 are tax-exempt in New York. Another example is grocery items, which are tax exempt in most, but not all, states. Also, services like graphic design or home repair aren’t taxable in most states, though some states, with North Carolina as the prime example, are learning more and more toward taxing services as they look for new ways to make revenue.
You can find out more about what is taxable and what isn’t in your state from your state’s department of revenue.
#3 – To which customers do I charge sales tax?
You are only required to collect sales tax from customers in states where you have sales tax nexus. “Nexus” is just a fancy way of saying a “significant connection” to a state. Each state makes it’s own rules and laws about what constitutes nexus, but here are the major factors:
- You live there – you always have nexus in your home state. If you are a small business, you most likely will only have nexus in your home state
- You have a location there – an office, store, sample room, warehouse or factory creates nexus
- You have personnel there – an employee, contractor, sales person, installer, etc. creates nexus
- You do temporary business there – making sales temporarily, such as at a trade show or craft fair, creates nexus in some cases. Each state is a little bit different in how many days you have to do business in the state to count as nexus
- You have an affiliate there – an “affiliate” in this case is someone who sends business your way in exchange for a cut of the profits. Many states now consider affiliates to create nexus in the state
When you are just starting out, you will likely only have sales tax nexus in your home state. It’s only as you grow – such as when you hire a remote employee in another state to help you with customer service – that you may find yourself on the hook to collect sales tax in other states. Evaluate your business operations from time to time to ensure you are keeping 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 being collecting sales tax. Most states consider it unlawful to collect sales tax from buyers without being registered. No matter what 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 generally based on the gross amount of sales you make (or project to make) to customers in the state.
Once you have your filing frequency, note down your sales tax due dates and be sure to file your sales tax returns on time. Also be sure you file a sales tax return even if you didn’t collect sales tax in that state over the filing period. Most states will gladly charge you a non-filing fee even if you don’t have anything to report or collect. It’s not fair, but it happens!
#5 – How much sales tax do I charge?
You’ve probably noticed that you pay a slightly different sales tax rate from town to town. For example, in my town in suburban Atlanta, I pay 6.5% in sales tax. But if I drive into the city to go shopping I pay 8%.
This is because while states all have a sales tax rate, most of them also allow local areas like counties and cities to tack on an extra sales tax rate. Many local governments fund a large portion of their budgets with sales tax.
When you sell online, collecting the right amount of sales tax can get tricky in a hurry. If you’re lucky, you live and have nexus in one of the “origin-based” sales tax states. This means that, no matter where your customer is located, you charge sales tax based on the tax rate at your location.
But the vast majority of states are “destination-based,” meaning that you are required to charge sales tax based at your customer’s ship to address.
Further, if you have nexus in more than one state, you are generally required to collect at the “destination-based” rate in any state that isn’t your home state. This can be quite confusing, and we break it down more for you in our “
Fortunately, many online shopping carts and marketplaces will handle sales tax collection for you, though you are ultimately responsible for ensuring you collect the correct amount of sales tax from your buyers.
#6 – What do I do with all the sales tax I collect?
When your sales tax filing due date rolls around, your next task is to figure out how much sales tax you’ve collected from your customers in that state and then file a sales tax return.
Reporting how much sales tax you’ve collected can be tricky in those destination-based states. The state departments of revenue want not just the total amount you collected from buyers in the state, but also the amount you collected broken down by county, city and other special taxing district. And most states have hundreds of jurisdictions.
Once your company is big enough that filling out sales tax returns is costing you hours of headache poring over zip codes and tax tables, it’s time to think about sales tax automation.
A sales tax automation solution will connect with the shopping carts and marketplaces on which you sell, slice and dice your eCommerce transactions, and present you with a sales tax return-ready report. From there, all you need to do is either fill you 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 understand that they are asking you to do a big chore when it comes to collecting sales tax. These kind states will let you keep a portion of the sales tax you collected as a sales tax discount. You can
I hope this post has answered your most common questions about sales tax. If you have any more, please reply in the comments or ask away over at our “Sales Tax for eCommerce Sellers” Facebook group.
About the Author
Jennifer Dunn is the Chief of Content at TaxJar, a service that handles sales tax collection, reporting and filing for more than 5,000 businesses. For a whole lot more about sales tax, check out TaxJar’s Sales Tax 101 for Online Sellers Guide.
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