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Sales Tax 101 for Small Business Owners and Online Retailers

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Sales Tax 101 for Small Business Owners and Online Retailers

By Caron_Beesley, Contributor
Published: February 21, 2012 Updated: April 30, 2012

Collecting sales tax is one of the most confusing aspects of transacting business – online and off!

In fact, questions about sales tax are among the most frequently asked on the SBA.gov Community “Filing and Paying Taxes” discussion thread.  Questions abound. When does sales tax apply? What transactions are exempt? What happens if you are selling online or to someone outside your sales tax jurisdiction?

Whether you’re starting a new business or expanding into e-commerce, here’s what you need to know about your sales tax obligations:

What is sales tax?

Sales tax is a retail point-of-purchase tax imposed by state and local governments that is paid by the purchaser for goods and services. As a small business owner, you are required to assess sales tax, collect it and pass it on to the appropriate authorities within the prescribed time. Sales tax rates and laws vary from state to state – which often leads to confusion, especially if you sell to customers in more than one state (more on this below).  Currently, Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon don’t impose general sales taxes at the state level. However, many localities in Alaska have their own local sales taxes. 

What is a sales tax permit and who needs one?

In order to collect sales tax, your state may require you to obtain a sales tax permit. You can find links to state tax resources from SBA here.

How do you process money collected as sales tax?

Generally, states require businesses to pay the sales taxes they collect quarterly or monthly. You’ll have to use a special tax return for sales taxes, and report all sales, taxable sales, exempt sales and amount of tax due. Not paying on time can result in penalties. As always, check with your state or local government about the process in your location. 

What types of transactions are exempt from sales tax?

While you should check with your individual state government as to which goods and services sold in your state are subject to sales tax (unfortunately, it varies a lot), generally you are not required to collect sales tax for the following transactions:

  • Resold items – Retailers and resellers don’t typically have to pay sales tax on wholesale purchases since it’s assumed that the end consumer will pay sales tax on these items at the point of purchase.
  • Raw materials – If you produce and sell goods that will be the raw material for other goods, these items are typically considered sales tax exempt.
  • Non-profits – Sales made to non-profits are exempt from sales tax.

If you are involved in these types of transactions, you’ll need to get a copy of the buyer’s tax-exempt certificate or number (issued by the state).

What if you sell to customers in different states?

This is a complicated gray area of sales tax law. What happens when your customers are located in other states – a common scenario for e-commerce and online business owners? Whose rules do you follow? Should you charge sales tax?

Here’s what you need to know:

  • If your business has a physical presence in a state (also known as a “nexus”), whether it’s a store, office, warehouse, employees, or other criteria established by your state, then you MUST collect sales tax from customers in that state.
  • If you don’t have a presence in a state, then you are NOT required to collect sales taxes.

As mentioned above, each state defines “nexus” differently; however, any bricks and mortar footprint in that state, such as an office or warehouse, will affirm that a nexus exists and sales tax must be collected.

What sales tax rate should you use when selling online or out-of-state?

This is the tricky part. If you’ve determined that your business must add on a sales tax charge for transactions in certain states (and the customer does not have tax exempt status), you’ll need to determine which sales tax rate to charge.

Sound overwhelming? Yes, it can be. With thousands of sales tax jurisdictions in the U.S., determining which sales tax rate to charge can be a challenge. If you operate an online business, it’s worth investing in online shopping cart services to handle sales transactions, many of which will automatically calculate sales tax rates for you. More comprehensive online sales tax solutions can also take care of the end-to-end process of calculating, collecting and filing sales tax return on your behalf. This blog from SBA guest blogger TJ McCue explains more about these options: Ecommerce Sales - Stop Customers from Abandoning Your Shopping Cart.

Got more questions? Consult a small business tax advisor or post them on the SBA.gov Community Discussion Boards.

 

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

We are a De authorized LLC company and will start promoting to various condition Govts as merchants. The products never come to us as our provider from one condition will deliver it to a condition government division in another condition. We do not want to go thru the stress of applying in every condition, gathering product florida sales tax, processing profits, spending revenue taxation & then processing for reimbursements. We are new and puzzled about this and would appreciate if someone can toss some light on this. Is there like a Multiple condition Exception to this rule certification for revenue tax? http://www.oliacoupons.com/store/godaddy-coupons/
I have a question about collecting sales tax. I am a retailer and currently do business with an organization that sells wholesale to the public. My question is how does a large company sell wholesale to the public and not charge sales tax? The company sells online and does not ask customers for a tax exempt certificate. I am very curious about this because it would seem that everyone could claim that they sell wholesale to the public to avoid paying sales tax. Is there certain criteria that has to be met? Thanks for any information you can provide.
I have a question, one of my employees sold a personal item at our store (retail/service industry) and they charged sales tax. How do I report this/ pay out the employee for their item?
I have a /question, one of my employees sold a personal item at our store (retail/service industry) and the charged sales tax. Hold do I report this/ pay out the employee for their item?
Wow! What a terrific and detailed post explaining the tax rules for online retailers. The Internet website industry is growing every day with new blogs and websites being creating. This has increased the amount of online retailers. Even the general public is going with the trend of shopping online instead driving to the mall due to the ease of online retail. The tax rules for online retailers are usually complex but this article proudest great information on what exactly needs to happen in terms of taxation!
Hello, I realize this is an old post, but I'm hoping you can help with a question. I bought some retail t-shirts online to resell at an event and just realized that I was not charged sales tax. Will I need to collect sales tax when I sell them? If so, it's a super small order (literally 10 tshirts). Is there a minimum I need to reach before I submit sales taxes? I am an artist and not a retailer, so I'm not sure about this. Thanks if you can help!
Hi, Caron I am a future business owner and my business will be based online. This will be a online boutique selling apperal and jewlery. Does online businesses pay sale tax?
We are a Delaware registered LLC company and will commence selling to various state Govts as resellers. The goods never come to us as our supplier from one state will ship it to a state govt department in another state. We do not want to go thru the hassle of registering in every state, collecting sales tax, filing returns, paying sales taxes & then filing for refunds. We are new and confused about this and would appreciate if someone can throw some light on this. Is there like a Multi state Exemption certificate for sales tax?? Jack
I live in New York, and am about to open an online store. The products that I'm selling are manufactured and stored in Wisconsin. So should the customers pay any NY sales tax or just WI sales tax? Thanks.

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