Sales Tax Basics: A Guide for New Entrepreneurs
Heads up: this article is only relevant for U.S. businesses.
Fraught with rules and exceptions, sales tax can be a daunting area for new entrepreneurs. Thankfully managing the task becomes second nature once you learn the basics.
In this guide we’ll walk you through the basic fundamentals you should know about managing sales tax, and how it affects your business.
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 very similar, each state has it’s own way of doing things, so never think that just because you collect or file sales tax one way in one state that it will be the same in another state.
2. You Only Need to Collect Sales Tax in States Where You Have “Nexus”
Nexus is just a fancy way of saying the minimal connection you must have to a state to be required by the state to collect sales tax from buyers here. The most common nexus-creating activities are: a location, personnel, inventory, a drop shipping relationship, affiliates or making temporary sales (such as at a tradeshow.) If you’re new to determining where your business has a nexus, read Sales Tax Nexus 101 and check out this post for a list of what creates sales tax nexus in every state.
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 sales tax. 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 sales tax fact 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 a 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. Sales tax due dates vary, so be sure you file sales tax by the state’s correct due date!
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 sales tax 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. Just like with anything new, collecting, filing, and complying with sales tax requirements gets easier with practice.
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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.