As a business owner, staying on top of your tax obligations isn’t always fun, but avoiding any surprises with “Uncle Sam” is always the better (and less expensive) option. While you might know that you need to pay federal and state income estimated taxes each quarter, you may be unaware of sales tax laws that could affect your business.
Sales tax: the skinny
Whether you’re a service-based business or sell products online or in a retail environment, you want to know if you’re required to collect (from customers) and pay (to the state) sales tax. Right now, businesses can be created online from anywhere and sell to people all over the world. So, what’s the deal?
Unfortunately, it’s not black and white. As a business owner, you must collect and pay sales tax if you have “nexus” within a certain state. What is nexus? It’s pretty much a designation that determines if you have enough presence in a state that requires you to pay sales tax. And what defines “enough presence” varies by state.
In general, one surefire way to have “nexus” is to have a physical presence within a state. For example, California defines “nexus” as having a physical location, an employee or affiliate working for you, or if you do business at a trade show. Any one of these connections shows you have presence in the state and are required to pay sales tax to that state.
Typically, if you sell things online to out-of-state buyers you don’t need to collect and remit that states sales tax. Unless you meet an online sales minimum which also varies by state. Consider Amazon, which pays sales tax in 45 states. Though Amazon doesn’t have a physical location in all of these states, it’s been determined that they have economic nexus meaning enough buyers to warrant sales tax liability. The other five states that exclude them from paying have no sales tax.
This is due to the Supreme Court ruling South Dakota v. Wayfair, that says states can require sales tax to be paid from out of state sellers even if you don’t have a physical location. This is because the way we buy and sell goods has drastically changed in the last 50 years and states are missing out on revenue opportunities causing the original ruling to be overturned. However, the good news is that most states have minimums and don’t require small businesses to remit. For example, California requires sales tax if your an out of state seller and your sales into CA customers exceed $500,000. Please remember that every state has a different threshold and you’ll want to check with each state of operation if you are a large seller.
Getting a sales tax permit
If you have “nexus”, you’ll want to get a sales tax permit from any and all states that you have this designation. Once you have the sales tax permit, you’ll have a set rate and a tax schedule to make payments. Remember that each state has its own rules and rates.
Your tax filing schedule, or when you need to make sales tax payments, could be quarterly, monthly, or yearly depending on your state. And of course, ComplYant will help you keep track of your filing schedule with reminders delivered to you directly.
After getting a permit, you will need to collect sales tax whether you’re selling at a retail store or online. It’s important that you understand that even if you don’t charge your customers the proper rate you are still required to remit that amount to the department of revenue. And just the opposite, if you over collect you are required to remit all amounts collected to the department of revenue. Tax authorities see it as their money and you are just passing it along for the customer to them. You’ll want to check with your local tax authority, which you can do here.
Who needs to collect sales tax?
To figure out if you need to collect sales tax, first see if your state has a sales tax obligation. The majority of states do, but there are 5 states that do not. Second, you will want to evaluate your nexus status, (physical presence, employees, affiliates, or larges sale amounts).
If you sell products, it’s almost guaranteed that you will be required to collect and remit sales tax. If you provide services and not products, your sales tax obligation will vary depending on your state. It’s often assumed that service businesses are not required to pay sales tax and that just is not the case in every state or for every service type.
It’s worth it to do a little research on sales tax compliance as it relates to your state. It can be complicated, but the decision to not comply is very expensive. Sign up for ComplYant now we can help you navigate taxability and due dates.