There’s no owner’s manual when you start your own business. This is especially true when it comes to dealing with U.S. sales tax. Each state’s sales tax laws, rules, and regulations are different. On top of that, each individual business’s sales tax liability varies. Because sales tax is so mysterious, many rumors and myths swirl around this ubiquitous business task. Today, we’ll bust the most common sales tax myths!
Myth #1: I pay sales tax to the IRS
Many new business owners are confused about the difference between income tax and sales tax. You pay income tax on the income your business makes. The IRS is responsible for administering federal income tax. (And if your state has income tax, your state’s taxing authority is responsible for administering state income tax.)
But sales tax is a state-level tax only. Forty-five states and Washington D.C. all have a sales tax. Sales tax is administered by each state’s taxing authority (usually called the “[state] department of revenue”).
Another difference between income tax and sales tax is that retailers collect sales tax from customers and pass the sales tax on to the state. Sales tax is a pass-through tax and you, the retailer, should never pay sales tax out of pocket.
Myth #2: I don’t have to collect sales tax if I only sell on the internet
Many online sellers, especially new sellers who only sell from home, are under the misconception that they don’t need to collect sales tax since they own a small, home-based business. Unfortunately, this is a myth. If you are selling taxable products in your business, then you are required to register for a sales tax permit with your state and collect sales tax.
Myth #3: Every business has to collect sales tax from customers
Sales tax is a tax on the sale of taxable products. In most states, tangible items (jewelry, coffee mugs, furniture, etc.) are taxable while services (landscaping, piano lessons, accounting, etc.) are not taxable.
To make matters more complicated, some states now consider some services to be taxable. If you’re unsure whether you are required to collect sales tax on the products or services you sell, check with your state’s department of revenue.
Myth #4: I don’t have to collect sales tax when I sell a product if I paid sales tax when buying that product
Many online sellers get their start doing “retail arbitrage.” Long story short, that means buying products at a low price and reselling them at a higher price. Since you are buying these products from retailers who are required to charge sales tax, you probably pay sales tax when making the purchase.
But the thing to remember is that sales tax is charged on the transaction, not the item. So even if you paid sales tax when you bought an item, you are still required to charge sales tax to your buyer when you resell it. (As long as you sell it to a customer in a state where you have sales tax nexus, but that’s a topic for a whole other post.)
Fortunately, there’s a way to prevent paying sales tax on and item and then having to turn around and charge sales tax to your buyers. You can use a “resale certificate” when making a purchase. When you use a valid resale certificate at a retailer who will accept it, you are not required to pay sales tax on items you intend to resale. You can find more info about resale certificates here.
Myth #5: I ALWAYS only have to collect sales tax in my home state
As a product seller, you only have to collect sales tax in states where you have sales tax nexus. Many new businesses only have sales tax nexus in their home state. But business create sales tax nexus in many ways, including:
- Having an employee or contractor in a state
- Having a location or inventory in a state
- Having an affiliate in a state
- Having a drop shipping relationship with a vendor in a state
- Making temporary sales in a state
As your business grows and changes, you may establish sales tax nexus in a new state. When you establish nexus in a new state, you are required to register for a sales tax permit and collect sales tax from buyers in that state.
Myth #6: If I didn’t collect any sales tax, I don’t have to file a sales tax return
When you register for a sales tax permit, your state will assign you a filing frequency and sales tax due dates. You will generally be required to file a sales tax return either monthly, quarterly or annually. This is true even if you didn’t make a single sale or collect a penny of sales tax over the taxable period.
If you have a sales tax return due, file that return even if all you tell the state is “I collected $0.00.” Failing to file one of these “zero returns” can result in everything from a monetary penalty to having your sales tax permit revoked. Don’t forget to file your return by the due date!
I hope this post has busted some common sales tax myths. For more about sales tax, check out our Sales Tax 101 for Online Sellers Guide.
- Get more: Tax tips for small businesses
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