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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: August 19, 2015

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 my boyfriend airbrushes shirts we are in NJ and Im not sure if we open a store in a local mall if we have to collect sales tax from the customer on shirts and hats? I thought there was something that regular clothes arent taxed but if they were customized then they are
I have a question about providing estimates to customers. What is the best practice - to estimate sales tax for customers and reconcile at final invoicing or disclose that sales tax is not included and calculate sales tax on final invoicing?
Technically, the business could pay the sales tax for the transaction and not pass it on to the purchaser. The gov doesn't care who pays as long as it's paid.
How far back can a company collect on sales taxes that were not charged due to a change in bookkeeping software? We are in Minnesota.
Hello, I'm with a local company in Bedford, TX and have no other location or do we have sales reps anywhere else and my question, is do we need to charge sales tax for out of state sales?
Do I need any sales tax number? I want to do online selling business, to sell clothing, supplementation. Can anyone please guide me what should I do? I have home based business set up for now in florida. I will appreciate if someone can guide me. I am very confuse.
Hi. I am doing a self audit on our MN customers to make sure we have exemption certs for our customers. We acquired a company in late 2013 and turns out one of their customers (a large one) has never been charged sales tax since 2008. I called them and they said they should be taxed. However, they have assessed use tax all the way back to 2008 on all invoices we submitted to them. My question is if an audit takes place for our company how to I prove to an auditor that even though we should have charged sales tax on all these invoices that the customer assessed and submitted the tax on their own to the state of MN? Are we still liable for the sales tax we did not correctly charge and submit or does the assessment of use tax on our customers end help us with no penalty? We have now started charging sales tax. Thank you.
Hi, on one of our jobs the customer was accidentally marked at a non-profit so we didn't charge sales tax. We caught the mistake and paid the sales tax, but the customer refuses to pay us for it. Do we have any recourse to get it from the customer?
Our terms for customers is payment Net 30. I recently sold to a customer and billed out sales tax and have since paid into the state that amount of sales tax. It turns out that my customer may not pay, do I have any recourse with the state to collect that money back because of a bad debt?
I am a crafter/sole proprietor who resides in IL. I pay sales tax in IL. I will be attending a craft show in Wisconsin in the near future. Do I need to collect/pay sales tax in Wisconsin for this one event?

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