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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
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:

Hi! I am a Landscapee/gardener who purchases plants, soil and other gardening materials for resale. Even though I have a resale license, I prefer to pay my tax when making my purchases. I charge an upcharge of 75%. For years my bookkeeper has instructed me to calculate my price to the customer as per this hypothetical $100 charge: $100 x 8.75%(sales tax) -= $8.75 (Tax charged at time of purchase) $100 + 8.75 = $108.75 $108.75 x 1.75(up charge) = $190.31 - client's cost Then on my quickbook invoices, all taxaable items are noted, the sum of which is appears as a single line item at the bottom - the total tax for that invoice. So the calculation (and final cost to client) for this one item would be: $190.31 x 8.75%(sales tax) = 206.96. Even though this has always seemed like charging tax twice, My bookkeeper has assured me that this second tax charge represents the government's required tax on my up charge. I have recently been challenged by a client (w/ business degree)about this practice and as we may be going to small claims (for non-payment ), I want to be sure that I am indeed taxing appropriately. Where might i find the specific written tax law for how to calculate tax on uncharged item? I would love to be able to quote an official document) Thank you for your response! Michael
Hi Michael. The final cost to your client should be $190.31. You would be passing on the $8.75 sales tax to your client to pay you back and you need to charge sales tax on the mark up only. Based on your hypothetical case based on $100 cost, $8.75 sales tax already paid, and mark-up of 75%, the final cost to your client should be calculated as follows: Internal: $100.00 "Cost of Tax Paid Purchase Resold" (Not Taxable since you already paid sales tax on it) $8.75 "Sales Tax Paid" (NOT Taxable since it's sales tax). Since you already paid for it, you are simply passing it on to your client to pay you back for this. $75.00 75% mark up (TAXABLE to client. You need to charge sales tax on your mark up) $6.56 Sales Tax on the Mark Up ($75 x 8.75%) $190.31 TOTAL COST TO THE CLIENT. Some vendors choose to disclose mark up and some don't, but essentially, the cost to the client should be $175 cost + $15.31 sales tax (8.75%) = $190.31. Since you already paid the $8.75 sales tax, you are simply passing this on to your client to pay you back, and in addition, you have to charge/collect sales tax on your mark-up. When filings our sales tax report on this transaction, you would be remitting only the $15.31 sales tax you collected to the appropriate agency, and the $8.75 is considered a "Deduction = sales tax already paid" which will reduce your sales tax liability because you already paid for it. Whoever you paid the $8.75 to sales tax when you made the purchase would remit that $8.75 sales tax to the agency. $206.96 is incorrect because you are charging sales tax on sales tax. Hope that makes sense!
Hi t bone, I'm not quite sure your answer to Michael is correct. Do you know which state he is operating in? Some states do allow the seller to absorb the tax. In other states they would consider he tax that he added in to be part of his mark up on the item. You could very well be correct but this is definitely state dependent. Part of the reason that sales taxes are so complicated. Hope that is helpful.
I have an interior design business and my client has asked me to work on her home in Tennessee and I am registered for business and sales tax in the state of Florida. What are the sales tax requirements and how do I handle it?
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?

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