Sales tax is a tax paid to the government for the sale of goods and services. Sales taxes are complicated because every state, county, and even municipality has their own unique sales tax rates and rules. Almost every state (and Washington, D.C.) requires you to collect sales tax on goods sold. Only five states don’t have a general sales tax:
Sales tax holidays are limited time periods (usually three days) where a state allows certain items to be tax-free. Sales tax holidays usually occur to encourage more spending.
Although states can have a sales tax holiday for any reason, the holidays usually fall into one of five categories:
clothing and footwear,
energy-efficient home appliances,
severe weather preparedness items, or
the Second Amendment.
Are Sales Tax and Use Tax the Same Thing?
Sales taxes and use taxes are not the same thing. Use taxes are imposed on interstate transactions, where sales taxes are imposed on intrastate transactions. Because of this, sales and use taxes are mutually exclusive. If you charge sales tax on a transaction, you won’t pay a use tax, and vice versa.
There are two types of use taxes: a consumer-use tax and a vendor-use tax.
A consumer-use tax is a tax imposed on the consumer. It’s self-assessed on items purchased from out-of-state, when the seller didn’t collect sales tax or pay a vendor-use tax. Many states now include a use tax line on their income tax returns to help consumers report their use tax.
A vendor-use tax applies to sales made by a vendor to a customer outside the vendor’s state or states, if the vendor is registered in the state of delivery.
How Do I Collect Sales Taxes?
If you sell products, it’s important to know the steps to take to collect sales taxes.
1. Know Where You’re Liable for Sales Tax
When you’re selling goods (and, in some states, certain services), make sure you know if you liable for sales taxes. You’re liable for sales taxes if you have a sufficient physical presence (also known as nexus) in that state.
Nexus is created if you maintain a permanent or temporary presence in a state. This presence could be employees, independent sales agents, an office, a warehouse, or inventory.
If you have a physical store, you’re liable for sales tax for the state, county, and locality that your store is located in. If you run an online store, you’re liable for sales tax in any state, city, municipality, and locality that you have a physical presence in.
Things might be changing! Click here to learn more about the recent Supreme Court ruling that could affect where you’re liable for sales taxes.
2. Obtain Sales Tax and Business Licenses
After you’ve determined where you’re liable for sales taxes, you’ll have to register with the state or states. Every state and jurisdiction has different requirements for registering your business.
To register your business, go to your state’s Department of Revenue website, then search for “Sales and Use Tax.” You’ll usually be able to register your business right from the website.
3. Know Your Tax Rates
You don’t want to over-collect or under-collect sales taxes, so make sure you know the rates for every state, city, and locality that you’re liable for.
4. Know What’s Taxable
Most products are considered tangible personal property (TPP), so they’ll be taxed at the standard sales tax rate. Some items, however, might have a higher rate, a lower rate, or no sales tax at all. For example, in the state of New Jersey, clothing is not taxable. Make sure you know what’s taxable so you’re not collecting too much tax.
5. Understand When to Collect Sales Tax Based on Origin or Destination
When it comes to same-state transactions, there are two jurisdictions: the origin and the destination. In some states, you’ll collect sales tax based on where the product is sent from. In other states, however, you’ll collect sales tax based on where you’re sending the product.
6. Maintain Exemption Certificates
Some of your customers might be exempt from paying sales taxes completely, such as resellers or 501c3 organizations. If one of your customers is exempt, you must request a copy of their exemption certificate and keep it on file to be able to prove you had a reason for not taxing their transactions.
7. File Your Sales Tax Return
Make sure that you’re filing your sales tax returns on time. Depending on what state you’re filing for and how much sales tax you’ve collected, your returns might be due every month, every quarter, or every year.
Do I Have to Collect Sales Taxes if I Only Sell Online?
When e-commerce first became popular, it seemed like no online stores were charging sales tax. But, purchases made online are not automatically exempt from sales taxes. In fact, online purchases are generally taxed the same as if they were made offline. If you sell a taxable item without collecting the sales tax, you might end up having to pay the tax directly to the state later (and it could be a big tax bill).
Thanks to the 1992 Supreme Court case, Quill Corp. v. North Dakota, states cannot require you to collect sales tax if you don’t have a physical presence in that state. Like offline stores, that physical presence can be a storefront, office, inventory, employees, or sales agents.
Be careful if you use something like Fulfillment by Amazon to deliver your products. Because Amazon stores your inventory in their warehouses, you might have a physical presence in multiple states, so make sure you know where your inventory is so you can collect the appropriate sales tax.
Still Confused about Sales Taxes?
If you have any questions about sales taxes or to ensure that you’re meeting your business’s sales tax obligations, talk to your accountant or a tax professional.