“Whatever happened to, ‘Hey I have some apples. Would you like to buy them?’ ‘Yes, thank you.’ That’s as complicated as it should be to run a business in this country.” – Ron Swanson, Parks & Recreation
Despite the wistfulness of comedy TV’s favorite anti-government government official, a direct exchange of goods and currency is not, in fact, the correct way to start a business. Among the many challenges faced by solo entrepreneurs and small business owners is the process of charging and handling sales tax for goods sold. If you’re working with a CPA (and we strongly encourage you to!), getting you up to speed on the correct procedures and laws about sales tax will likely be a key conversation.
Let’s get you up to speed with a quick-start guide to understanding your responsibilities around sales tax:
- When is sales tax required?
- How do you collect sales tax?
- What do you do with the taxes once collected?
When is sales tax required?
Sales tax is typically required when a business sells goods or services to customers within a specific jurisdiction, such as a state, county, or city. The exact requirements for collecting and remitting sales tax can vary depending on the jurisdiction, but in general, sales tax is required when:
- The sale takes place within a jurisdiction that imposes a sales tax.
If your business is physically located in a jurisdiction that imposes a sales tax, you will generally be required to collect and remit sales tax on all taxable sales made to customers within that jurisdiction.
- The customer is located within a jurisdiction that imposes a sales tax.
If you make sales to customers located in a jurisdiction that imposes a sales tax, you may be required to collect and remit sales tax on those sales, even if your business is not physically located within that jurisdiction. (Think: online sales.)
- The items sold are taxable.
Sales tax is typically only required on goods and services that are considered taxable. The specific items that are subject to sales tax can vary depending on the jurisdiction.
It is important to note that sales tax laws and regulations can be complex, and may vary depending on the jurisdiction in which you are operating. To ensure that you are complying with all relevant sales tax laws, it is often advisable to consult with a tax professional or accountant.
Sales tax nexus
A term you’re likely to hear in this matter is sales tax nexus: a legal term used to describe the connection between a business and a state or locality that gives the state or locality the authority to require the business to collect and remit sales tax on its taxable sales. In other words, if a business has sales tax nexus in a particular state or locality, it is required to collect and remit sales tax on sales made to customers within that jurisdiction.
Sales tax nexus can be established in several ways that mirror the requirements for when sales tax is required:
- Physical presence
If a business has a physical presence—such as a store, office, warehouse, or other facility—in a state or locality, it typically has sales tax nexus and is required to collect and remit sales tax on taxable sales made to customers in that jurisdiction.
- Economic presence
If the business has significant sales within the state or locality, or if it has established other types of connections, such as through affiliate relationships or other business activities, it may have sales tax nexus in those areas. For example, a business located in Alaska (no general sales tax) selling online in Illinois may have sales tax nexus in Illinois.
- Other factors
In some cases, other factors, such as the use of drop-shipping arrangements, can also establish sales tax nexus and require a business to collect and remit sales tax in a particular jurisdiction.
Use this online resource to start determining whether you have sales tax nexus in any states. Don’t forget to consult with your CPA!
How do you collect sales tax?
If you are required to collect sales tax, you will need to obtain a sales tax permit or license from the taxing authority for each state where you have sales tax nexus. Once you have your permit or license, you can begin charging sales tax on your goods.
The requirements for obtaining a sales tax permit may vary depending on your location and the type of business you have. However, in general, you will likely need to provide the following information:
- Business information
You will need to provide your business name, address, phone number, and email address. You may also need to provide your Employer Identification Number (EIN) or Social Security Number (SSN).
- Business structure
You will need to indicate the legal structure of your business, such as whether it is a sole proprietorship, partnership, LLC, or corporation.
- Business activities
You will need to describe the products or services you sell, as well as the locations where you conduct business.
- Sales information
You will need to estimate your expected sales and provide information on how you will collect and remit sales tax.
- Personal information
You may need to provide personal information, such as your name, address, and SSN, if you are the owner or an authorized representative of the business.
To obtain a sales tax permit, you should contact your state or local government’s tax agency, which will provide you with specific instructions on how to apply for a permit and what documentation you need to provide.
How much sales tax to collect
Each state has its own sales tax rate, which may vary by locality. You will need to determine the correct rate to charge based on where the sale occurs. Some states also have rules about what is taxable and what is exempt, so you will need to know these as well.
Once you know the correct tax rate and rules, you will need to collect the tax from your customers at the time of the sale. You may need to separately state the tax amount on your invoices or receipts.
It’s a good practice to keep sales tax collected from customers in a separate bank account. This will help you keep track of the amount of sales tax you have collected and make it easier to remit the tax to the appropriate tax authority.
How do you remit sales tax?
You will need to periodically remit the sales tax you have collected to the appropriate state agency. The frequency of remittance varies by state, and some states may require you to file a return even if you did not make any sales.
To remit sales tax to a state, you will typically need to follow these steps:
- Check with the state tax authority for each state where you have sales tax nexus to determine the frequency of your sales tax payments.
- Use your sales records to calculate the amount of sales tax you owe for the reporting period. (Ideally this should match what is in your separate sales tax accounts.)
- Fill out the appropriate form for your business and include the amount of sales tax owed.
- Make payment. Some states allow businesses to pay sales tax electronically through their website, while others may require payment by check or money order.
- Keep detailed records of your sales tax payments, including the date and amount of the payment, the reporting period, and any confirmation numbers or receipts.
Get a CPA. As we’ve previously argued, the expense of a CPA for a small business, particularly for new entrepreneurs, far outweighs the costs involved.
Use a system like Solo Hustle to make record-keeping easier. With Solo Hustle you can create line items for each tax rate for each state and locality for which you have nexus, making it easy to quickly calculate correct taxes.