One of the most confusing and annoying aspects of owning a small business is calculating, collecting, reporting and paying sales tax. In the United State, there is no federal sales tax, but 45 states require sales tax on business transactions. Each state has individual tax exemptions, deadlines, laws, and rates.
It is no wonder that questions about sales tax are among the most frequently asked from small business owners all across the country. So whether you are a start up business or expanding in the world of e-commerce, here is what you will need to know about your sales tax obligations.
State sales tax pertains to most retail products (but rarely any service). If your business has a physical location such as an office, store, or warehouse, you are required to charge sales tax on purchases. Depending on your state you might also need to apply for a sales tax permit. You will need a license to collect appropriate state and local sales tax from your clients or customers. Your business will then quarterly or monthly pass the amount on to the state revenue office or appropriate municipality.
What is Sales Tax?
If you have ever been to a store, you will know that sales tax is the percentage of the purchase that is paid to the state. I can be applied to certain goods and service within the borders of that state. Typically, this refers to material objects, but this can also vary based on the state.
Each state has its own exemptions to sales tax, so it is important that small business owners need to learn the applicable state and local tax rules and regulations that apply to them. However, there are several exemptions based on the type of items sold, property use and buyer identify. For more information, I encourage you to visit the Small Business Administration.
“The hardest thing in the world to understand is taxes.”
– Albert Einstein
What Businesses Owners Need to Know:
For a state to require a business to collect and pay sales tax they must have a physical presence or nexus. The definition of a physical presence is vaguely defined and will vary widely by state, however, at a basic level, it is a temporary or permanent physical establishment.
You are required to collect and pay sales tax if:
- Your business, office, or any other business facility is located within the state.
- The business owner or employees enter the state to perform business.
- Property within the state is owned or leased
State tax my specific products or services?
State sales tax rates vary based on the state sold and the products and services rendered. For examples, frozen food might be subject to sales tax in one state but not another. This also applies to clothing, groceries, prescriptions and other sale items.
Is sales tax based on the location of my business or my buyer?
If you live in a destination-based state, you will need charge sales tax based on the location of your buyer. Businesses are responsible for tracking and calculating different state local taxes. For example: If the destination of the product has a state tax of 5 percent and a local sales tax of 3 percent, the business must charge a total of 8 percent.
Alabama, Arkansas, Colorado, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, South Dakota, Vermont, Washington, West Virginia, Wisconsin, Wyoming.
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