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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:

I have started a new cleaning business in Quebec and what I need to know. I'm considered a small business as I'm under 30,000 a year so i would like to know when I make my invoice do I still have to put the GST and QST on the invoice. I'm cleaning 2 daycares right now. I'm incorporated
Hello, I'm starting a new business selling my primitive craft, reclaimed wood products, and some antiques. Do i need a Tax ID, Vendors lic and what needs to be done once I get that. I will be selling from my home and it will be seasonal open houses. Is there any tax exemption for small business. I'm just starting out so will not make more than few hundred dollars. Please let me know
Hello, I'm starting a new business selling costume jewellry and cushion covers. Do i need a sales tax permit and what needs to be done once i get the number. How often will i need to file taxes with the government. Is there any tax exemption for small business. I'm just starting out so will not make more than few hundred dollars. Please let me know.
I have a very small cleaning business. I mostly clean houses which I do not have to charge sales tax. Now I would like to start cleaning for some businesses. I need to register and charge them tax. Will this in any way effect my current clients? Does it change what code I use when I file taxes? Can I charge some costumers tax and not others?
We have just started our business and we pay tax on our supplies, do we still need to collect sales tax on our finished product when we sell it?
I've been looking around for a while and can't seem to find an answer to what I'd think would be a straightforward question: What do we collect during an online purchase to determine any applicable sales tax, and how do we validate it? Put another way: what piece of information precisely determines the location of the person performing the purchase? It seems common to use a shipping address, but people can have products shipped to locations other than their own. And some products (ie, online services) might not have a physical product to ship, so don't ask for that information. Then there's the billing address but if you're using a company card, it might be issued from a location other than where the purchaser is actually located. And there are billing methods, like PayPal or ACH, that might not require you to enter a billing address. It seems like the only remaining alternative is to simply ask the person where they are, but then how do we validate that? Is it just on the honor system? What's preventing them from putting in a location they know you don't have a nexus in so they aren't asked to pay taxes? There seem to be some pretty big gaping holes in the accuracy of tax collection...
I am trying to start a retail business selling airsoft related items, but to start out I want to purchase the items retail, then resell them for a minor upcharge to make some sort of profit. What I would like to know if a 'sales tax' would need to be collected on this type of transaction since I have already paid that tax when I purchased the items. Once I get the business established I would be purchasing items at wholesale and I understand how to collect sales tax at that point. I live in New York State. Thank you for your feedback!
My printing company is in Texas. I use a printer in California. We ship printed mainly for one company that has offices across the United States. When I ship a finished job from CA to PA, or CA to GA, do I charge sales tax? Thank you!
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?

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