No one should assume they have “enough” education when it comes to sales tax, with regular changes to regulations, it can be hard to keep up to date with the latest updates. But if you need help understanding some of the basic foundations of sales tax as it stands, then we can help.
Here’s a guide with 9 sales tax basic regulation you should know
1. Sales tax is governed by the states
Sales taxes are collected and managed by the state as there is no federal sales tax in the United States. Forty-five out of the 50 states in the US collect sales tax on a state level, with 38 of these 45 states collecting additional local taxes on every purchase.
The remaining 5 states; Alaska, Delaware, Montana, New Hampshire, and Oregon don’t have a state sales taxes, however Alaska and Montana allow its localities to charge local sales tax.
Every state makes its own regulations concerning collecting and paying sales taxes. Some state laws are largely similar with little changes, so be careful not to assume that everything is the same when collecting and filing sales tax one state as it is with another.
2. You only collect sales tax in states in which you have nexus
Nexus is a simple way to claim that your business does some form of business in a state and/or locality and thus you are required to pay sales taxes there. For example, when delivering a product, you have sold from one state to another, the delivery van would make use of at least one public infrastructure to make the delivery, in this case the road, and thus the state requires you to collect and make sales tax payment to it to help maintain the infrastructure you have used
eCommerce businesses regularly have nexus in the other states they deliver to, but also have nexus in their home state usually because they have a physical building there or even sell to people in the same state. So, you still have to collect and pay sales taxes in the state you are operating from.
Things that can make your business have “nexus” in other states include:
- Having a physical location (e.g., a warehouse, factory)
- Having employees
- A drop shipping relationship (e.g., supplier relationship)
- Affiliates
- Temporary events or sales (e.g. conference)
- A significant volume of online sales
The good news is that for most states you don’t pay sales tax until you reach certain criteria including making a fixed amount of sales in a year or reaching a number of transactions in the state.
3. You are to register for a permit before you begin collecting sales tax in a state
States require that you register for a sales tax permit (also known as seller’s permit or sales tax license) before collecting sales tax from customers in the state. Applications for the permit can be done online or in person at the state’s taxing authority. Some states allow you to apply for free, while some charge a fee and applications usually take two weeks to complete.
4. You collect sales tax across all sales channels
For every state you have a nexus, you are required to collect sales tax from all of your customers no matter the sales channel or point of sale. Meaning you collect sales tax when people buy from you either in person at your store, on your website, shopify, amazon, ebay, etsy and even across your social media channels. Some marketplace like shopify and etsy provide tools to help you automatically collect and file taxes collected
5. Due dates vary by state
Most states ask businesses to file their sales tax return on or before the 20th day of the month after the taxable period (i.e., either a month, quarter or year.) Other states chose 25th or the last day of the month as their due date. Be sure to confirm from your states’ tax board to be sure you never miss a tax deadline.
6. Frequency for remittance can vary a lot
With each state deciding their tax rules, they also determine how often sales tax can be filed. Most states require filing to be done monthly or quarterly. In some cases, some businesses are allowed to file annually or even semi-annually.
The frequency at which your business would be required to file will be determined while registering for a permit.
7. You are required to file a return even if you didn’t collect any sales tax
In cases where you are scheduled to file sales returns monthly for a state, you would still be required to file one even if you didn’t make any sale to that state in the last month, these are called zero return, and failure to file one can lead to a $50 fine or having your sales tax license revoked if repeated.
Now for some exciting news:
8. You can get discounts for filing on time
Some states allow business owners to keep a small percentage of the sales tax collected over a period simply for paying on time. So, that’s it, you get a reward for your hard work
9. You can save some money by avoiding to pay double sales taxes
As a business, you don’t get to pay sales tax when you purchase goods required to manufacture other goods or when you buy goods for resell. So, check with your state tax body to find out if you qualify for a resale certificate. If you do, present that certificate to your vendors so you are exempted from paying sales tax when you purchase from them.
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