Heads up: this article is only relevant for U.S. businesses.
Fraught with rules and exceptions, sales tax can be daunting for new entrepreneurs. But most of the confusion is in getting set up and figuring out how much you need to collect.
We asked our friends at TaxJar to share an overview of sales tax in jargon-free language everyone can understand. Here’s everything you need to know about managing, collecting, and filing sales tax.
Sales tax in a nutshell
If you haven’t filed sales tax in the last year (or you’ve never filed at all), here’s a simple explanation of sales tax and how it affects your business.
Forty-five U.S. states and Washington D.C. all have a sales tax. If you sell taxable products (which most products are), you’re required to collect sales tax from buyers in your home state and any other states where you have sales tax nexus.
If you only sell on one sales channel, like eBay, your sales tax collection, reporting and filing is fairly easy. But if you sell on more than one channel, you need to make sure you are collecting the right amount of sales tax from buyers on all of your sales channels and in each of your nexus states.
You’ll need a sales tax permit from your nexus state before collecting sales tax. Once you receive your permit, your state will assign you a sales tax filing frequency (generally monthly, quarterly, or annually) and sales tax filing due dates.
9 sales tax basics every entrepreneur needs to know
Before you collect sales tax from your customers, here are some specifics that can influence how you manage, collect, and file your sales tax return.
1. Sales tax is governed by the states
There’s no such thing as a “federal” sales tax. Forty-five states (and D.C.) have a sales tax, while Alaska, New Hampshire, Delaware, Oregon, and Montana do not. Each state makes its own laws and rules when it comes to sales tax. While some laws are similar, each state has its own way of doing things, so don’t think that because you collect or file sales tax one way in one state that it will be the same in another state.
2. You only collect sales tax if you have nexus, or if that state says so
Nexus is just a fancy way of saying that your business is connected to a state, and is therefore required to collect sales tax from buyers there.
Your business will usually have nexus in its home state. But it’s also possible for your business to have nexus in additional states, so it’s something you need to keep an eye on.
Things that can make your business have “nexus” in another state include:
- A physical location (e.g. a pop up store, a warehouse)
- A drop shipping relationship
- Temporary sales
If you’re new to the idea of sales tax nexus, read Sales Tax Nexus: A Guide for Online Sellers and check out this post for a list of what creates sales tax nexus in every state.
If you have an ecommerce business, it’s no longer just nexus that determines whether you have to collect sales tax in a particular state. Effective July 1, 2018, the Supreme Court gave states the ability to require sales tax if you sold to any customers in their state, regardless of whether or not you have nexus there.
3. Always register for a sales tax permit before you begin collecting sales tax
States require that merchants register for a sales tax permit (sometimes called a seller’s permit or sales tax license) before you begin collecting. Register at your state’s taxing authority, which is often called “[State] Department of Revenue.”
4. Collect sales tax in all nexus states on all channels
This sometimes trips people up: If you have sales tax nexus in a state, you need to collect sales tax from all of your customers in that state, on all of your sales channels (e.g. via your online store and brick-and-mortar outlet). Sales tax nexus is not channel-specific, even if it’s your activities on that channel that have cause you to have sales tax nexus in that state.
5. The sales tax rate you collect “depends”
Some states are “origin-based” sales tax states and some are “destination-based” sales tax states. In origin-based states you collect based on your business location. In destination-based states, you collect based on your buyer’s location.
Destination-based states are tougher when it comes to collecting and filing sales tax. Unfortunately, there are also a whole lot more of them! Learn about the nuances of origin and destination-based sales tax here.
6. How often you file sales tax depends on sales volume
Generally, the higher your sales volume in a state, the more often you will be required to file a sales tax return in that state. Most states require sellers to file either monthly, quarterly or annually. There are always exceptions. Some states have semi-annual filing, and others will start you out filing monthly no matter your sales volume.
The state will assign you a sales tax filing frequency when you register for your sales tax permit. Use this interactive state sales tax map to check the sales tax due dates in each state.
7. Sales tax due dates vary by state
Since states make their own sales tax rules, they can also set their sales tax due dates. A majority of states want sellers to file a sales tax return on the 20th day of the month after the taxable period (either month, quarter or year.) But other states have due dates on the last day of the month, or on the 25th.
8. File a sales tax return even if you didn’t collect any sales tax
You’ll still need to file a sales tax return even if you didn’t collect any sales tax over the taxable period. Why? Because states are sticklers about “checking in” on registered sellers, even if your business wasn’t active during the financial year. Failing to file a zero return can result in anything from a $50 penalty to having your sales tax license revoked.
9. Some states will give you a discount for filing and paying sales tax on time
Over half the states with a sales tax understand that collecting sales tax from your customers and filing periodic returns is no walk in the park. So they will allow you to keep a small percentage of the sales tax you’ve collected, as long as you pay on time. Here’s a list of states and the sales tax discounts they offer. Don’t leave money on the table!
If you’ve read this far and you’re feeling overwhelmed, just remember that getting started is the hardest part. All of these fundamentals may make sales tax sound, well… taxing. But it really isn’t. Collecting, filing, and complying with requirements gets easier with practice.
How to file your sales tax return
So you’ve been collecting sales tax, and it’s time to file. Here are the steps you need to follow to file.
Determine your sales tax filing due date(s)
Most states want sellers to file sales tax returns on the 20th of the month after the taxable period, but due dates in many states can vary.
For example, some states want to hear from you on the 15th of the month, some on the last day of the month, and some on various other days.
Check this list of January Sales Tax Due Dates in 2018 to find your state’s sales tax filing due date
Double-check your sales tax filing frequency
We mentioned before that you might file monthly, quarterly, or annually (or even some other frequency, like semi-annually). But did you know that this frequency is also subject to change?
If your sales volume within a state has risen or fallen over the previous year, the state might change your sales tax filing frequency. The rule of thumb is that the more revenue your business makes in a state, the more often that state wants you to pay sales tax.
Be on the lookout for a letter from your state’s taxing authority updating your filing frequency.
Report how much sales tax you’ve collected
Now it’s time to report how much sales tax you’ve collected in each state where you have nexus.
Some states have a flat sales tax rate and simple filing. In this case, you just figure out how much sales tax you collected from buyers in that state (be sure to add up sales tax from all the platforms on which you sell) and remit that to the state along with a sales tax filing.
Unfortunately, most states aren’t that simple. They want you to break down how much sales tax you’ve collected not only by state, but also by county, city, and other special taxing jurisdiction. If you have to file in complicated states like this, sales tax reporting can take hours. And that reporting is only aggravated if you have to factor in sales tax you collected through multiple ecommerce channels.
Tools like TaxJar that offer sales tax automation can gather and sort all of this information for you. It connects with the channels through which you sell, report how much sales tax you should file in each state, county, city and other district.
Once you’ve figured out how much sales tax you’ve collected, you’ll need to file your sales tax return.
File your sales tax return
This is the easy part. Once you’ve gathered and confirmed all of the information you need to file, simply log into your state’s taxing authority filing system and file your return.
You’ll be guided through submitting your payment, and then you’re all set.
Pro tip: give your business an annual sales tax checkup
January is an excellent time to give your business an annual sales tax review, and double check that you’re collecting and processing sales tax as efficiently as possible.
Here’s what you’ll want to review to make sure your business is sales tax compliant going into the new year.
Check your nexus states
As you grow and expand your business, you may find that you have sales tax nexus in more states. Nexus is created when you have a “significant presence” such as a location, an employee or contractor, or inventory stored for sale in a state. You can see what every state’s laws have to say about sales tax nexus here.
Make sure you’re collecting correctly
As you expand your online business you may start selling on other shopping carts and marketplaces. Take the time to double check that you are collecting sales tax in all of your nexus states on all of your current shopping carts and marketplaces.
Automate sales tax reporting and filing
Collecting and filing sales tax won’t help your business grow. It’s more like an obligation. If you are spending time reporting and filing sales tax when you could be growing your business, it may be time to automate your sales tax compliance. A sales tax solution can report how much sales tax you’ve collected in a state and automatically file sales tax for you.
Still have questions? Ask a pro for help in TaxJar’s free Sales Tax for eCommerce Sellers Facebook group.
TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers. Claim your 30-day free trial of TaxJar, and eliminate sales tax compliance headaches from your life.