This is a guest post by Mark Faggiano, Founder and CEO of TaxJar
“I started my business because I love dealing with obscure sales tax laws,” said no business owner ever.
But sales tax is a part of life when you own a retail business. And with a little preparation and some tips and tricks, it can be a small hassle rather than a major ordeal. This post will give you a quick step-by-step guide to sales tax for online sellers so you can get back to the fun (and profitable!) parts of running your business.
Why do we have to charge sales tax?
Sales tax is a percentage tacked onto a transaction that is remitted back to a state. Forty-five U.S. states (and D.C.) rely on money collected via sales tax to fund budget items like schools, roads and public safety. Some states only have a flat sales tax rate, but most states also allow counties, cities and other special taxing districts to also levy a sales tax. This is why you might notice your sales tax rate is 6.5% when you make a purchase in your hometown, but the sales tax rate is different when you drive one city over to make a purchase.
Sales tax is governed at the individual state level, and states require merchants to actually collect the tax and then remit it back to the state to be distributed to all those cities, counties and special taxing districts.
As the merchant in question, here are the 5 major steps you need to complete to put a lid on sales tax.
1.) Determine Your Sales Tax Nexus States
“Nexus” is Latin for a “significant connection” and if you have sales tax nexus in a state that means the state can legally require you to collect sales tax in that state. Since sales tax is governed by state law rather than federal law, every state’s sales tax laws can be a little different. But here are the most common factors that create sales tax nexus:
- Your home– Even if you work from your kitchen table, you have home state nexus and should collect sales tax from buyers in your home state if you sell taxable items
- A location – A store, office, warehouse, factory, sample room or other location creates sales tax nexus
- Personnel – An employee, contractor, sales person, installer, etc. generally creates sales tax nexus
- Inventory – storing inventory in a state generally creates sales tax nexus
- Drop shipping – A drop shipping relationship might create sales tax nexus (whether or not it does depends on the tax liability of both you and the drop shipper you are using)
- Affiliates – If an affiliate sends you sales in exchange for a percentage of the profits, then you have sales tax nexus in some states if you reach a certain threshold of sales in those states
- Trade shows, craft fairs, etc. – Make sales in a state, even temporarily such as at a trade show or other event, sometimes creates sales tax in that state if certain conditions are met
If you have questions about whether your activities create sales tax nexus here are a few resources:
- What every state’s laws have to say about nexus
- Phone numbers to contact each state’s taxing authority
- A list of vetted sales tax experts who can help you determine your sales tax nexus
Once you’ve determined where you have sales tax nexus, your next move is…
2.) Register for Your Sales Tax Permit(s)
States require that you be registered for a sales tax permit (sometimes called a seller’s permit or use tax permit) before you begin collecting sales tax. Here are guides to registering for a sales tax permit in every state.
Don’t skip this step! Most states consider it unlawful to collect sales tax in their name without a permit. In their suspicious minds, anybody collecting sales tax from buyers without a permit is pocketing the extra few cents per dollar for themselves!
When you register for your sales tax permit, your state will assign you a sales tax filing frequency and due dates. You’ll generally file either monthly, quarterly or annually. The higher your sales volume in a state, the more often you’ll file in that state.
3.) Collect Sales Tax on All Channels
Once you have your sales tax permit in hand, your next step is to ensure you are collecting sales tax in all of your nexus states on all of your sales channels.
A common mistake is to realize that you have sales tax nexus in a new state, but forget to set all of your shopping carts and marketplaces to collect sales tax in that state. We’ve put together how to guides for collecting sales tax through the most common shopping carts and platforms here.
4.) Report How Much Sales Tax You’ve Collected
When your sales tax filing due date rolls around, you might find that reporting how much sales tax you’ve collected is trickier than it seems.
A small handful of states are simple – they just want you to report how much sales tax you’ve collected from buyers in the state. But most states rely on you – the seller – to tell them how much sales tax you collected from buyers in each of the state’s counties, cities and special taxing districts. With over 12,000 taxing jurisdictions in the U.S., trying to figure this out for each and every one of your sales can quickly turn ugly.
Technology to the rescue! Sales tax automation solutions will integrate with all the shopping carts and marketplaces where you sell and create return ready reports for you, in just the format the state wants to see. No more Googling zip codes or poring over tax tables to break down sales tax rates all over a state.
5.) File Your Sales Tax Return(s)
Once you’ve determined how much you need to file, your next step is to file your sales tax return with the state and remit the funds that you owe.
You generally have two options for doing this. The first is to file online with the state (some allow you to file by phone or paper, though most try to encourage you to use their online system.
The second is to use a sales tax automation solution to AutoFile for you. AutoFile takes sales tax completely off your plate!
And that’s it! You’ve put a lid on sales tax until your next deadline rolls around. For more about sales tax, check out our Sales Tax 101 for Online Sellers Guide.
Mark Faggiano is the founder and CEO of TaxJar, a service built to make sales tax compliance simple for eCommerce sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
Image: Flickr, Stockmonkeys.com
