Sales tax is one of those necessary business tasks that can be a little daunting at first. At TaxJar, we live and breathe sales tax and have distilled the process into six things you absolutely must know. If questions have sales tax have ever nagged you in the back of your mind, this post is for you!
Author Mark Faggiano is the founder and CEO of TaxJar
Sales Tax 101
Sales tax is a percentage of the sale price of a product. Retailers collect sales tax from buyers and remit it back to the state at a set time period (usually monthly, quarterly, or annually.) States use sales tax to fund state budget items like roads, schools, and public safety.
Sales tax is governed and regulated at the state level. So if you have to deal with sales tax in more than one state, you may follow very different sets of rules and laws. This is just one of many reasons sellers can initially find sales tax intimidating!
States mainly require you to charge sales tax if you sell “tangible personal property” like books or toys or furniture. In most states, services aren’t taxable, though that may change in the future. (North Carolina, for example, has already passed a comprehensive sales tax on many services.)
Some products are not taxable in one state, but may be taxable in another. Or they may be taxable, but at a reduced rate. This includes things like food, clothing and digital products like music downloads or eBooks.
Some states also consider the shipping amounts you charge your customers to be taxable, while others do not. You can find your state on this sales tax map to determine if what you are selling is taxable or non-taxable.
Sales Tax Nexus
As for this writing, retailers only need to charge sales tax to buyers in states where you have “sales tax nexus.” Nexus means a “significant connection” to a state and, though every state is slightly different, is usually made up of these factors:
Location – A home office, office, store, factory, warehouse, etc. generally creates sales tax nexus
Personnel – Employees, salespeople, installers and even contractors generally create sales tax nexus
Inventory – Storing inventory in a state generally creates nexus
A Drop Shipping Relationship – Drop shipping is one of the most complex sales tax scenarios, but it can create sales tax nexus for you in a state
Affiliates – If you have affiliates who send sales to you in exchange for a percentage of your revenue on that sale, you may have sales tax nexus
Temporary Sales – Selling products at a trade show or craft fair creates sales tax nexus in many states
Here’s what each individual state has to say about sales tax nexus.
Sales Tax Permits
If you have nexus in a state, then that state requires you to collect sales tax from buyers in that state. But before you do that, you should register for a sales tax permit. (AKA sales tax license or seller’s permit.)
Always get your sales tax permit before you start collecting sales tax. States actually consider it unlawful to collect sales tax without a permit!
You can find more info here on how to register for a sales tax permit with each state.
Collecting Sales Tax
How to collect sales tax from buyers depends on the platform you sell on. If you sell on a shopping cart like Amazon, eBay or Shopify they have built-in sales tax collection. If you’re building your own shopping cart or marketplace, you’ll need to make sure to build in a sales tax calculation engine.
Either way, you’ll need to be sure you’re collecting sales tax from the right customers at the right rates!
What to Do with the Sales Tax You’ve Collected
When your sales tax filing due date rolls around, it’s time to file a sales tax return and remit all that sales tax you’ve collected to the state. You can file online or if you have better things to do than file sales tax, we have a sales tax automation service file for you.
Be sure to file on time – most states charge interest and penalties if you’re late. You should file a sales tax return even if you didn’t collect sales tax. Many states will charge a fine for failing to file, even if you owe $0.
Also, some states will give you a sales tax discount for filing on time! This is a small percentage of the sales tax you’ve collected but will add up to free money fast. So don’t leave your discount on the table!
We hope this blog post has untangled the complex world of sales tax for you. We’ve just scratched the surface here, so if you’d like to know more, check out our Sales Tax 101 for Online Sellers guide or join over 5,000 fellow sellers in our Sales Tax for eCommerce Sellers Facebook Group.
TaxJar is a service built to simplify sales tax compliance for eCommerce sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!