Sales Tax Compliance 101
Updated June 2022
Sales tax have you feeling in over your head? Shiloh Johnson is diving in to share what sales tax you might owe and how to avoid common pitfalls that could sink your bottom line.
As a business owner, staying on top of your tax obligations can feel a bit like running through an obstacle course. By now, you’re probably getting comfortable with paying federal and state income estimated taxes each quarter, but trying to navigate your sales responsibilities is throwing you off course.
We know the last thing you want to do is run into tax trouble with Uncle Sam, so we’ve got you covered. Read on to learn more about sales tax, how to determine if you’re responsible for paying these fees, and how failing to pay sales tax can impact your business in the future.
Here’s the skinny on sales tax
Wondering if you’re responsible for paying sales tax? If you’re the owner of a service-based business and that sells products online or in a physical retail environment there’s a high chance that you’re on the hook for paying sales tax.
Unfortunately, sales tax rates and what state receives your payments is not so black and white. Right now, businesses can be created online from anywhere and reach customers all over the world. So, what’s the deal?
As a business owner, you must collect and pay sales tax if you have a nexus within a certain state. A nexus is pretty much a designation that determines if you have enough presence in a state that requires you to pay sales tax. What defines “enough presence” varies by state.
Look up sales tax resources by state.
In general, one 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 a presence in the state and requires that you 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 state's 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 an 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, which says states can require sales tax to be paid from out-of-state sellers even if they 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 you’re an out-of-state seller and your sales to Californian 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.
As a business owner, you must collect and pay sales tax if you have a nexus within a certain state.
Getting a Sales 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. ComplYant can 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 to understand that if you fail to charge your customers the proper rate, you are still required to remit that amount to the department of revenue. The opposite is also true; if you over-collect, you are required to remit all amounts collected to the department of revenue.
State tax authorities see sales tax as a revenue-generating opportunity, and you are just passing it along from the customer to them. For more detailed information about your state’s laws, you’ll want to check with your local tax authority, which you can do here.
Who needs to collect sales tax?
Failing to meet your sales tax responsibilities can lead you down a path toward expensive penalties. 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 five states that do not. Second, you will want to evaluate your nexus status. Remember, depending upon your state, this could mean physical presence, employees in the state, other 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, but that 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. Consider making use of platforms like ComplYant to help you navigate taxability and due dates, so you can stay one step ahead of your tax obligations.