Sales Tax Basics: Are You Charging and Paying Them Accurately?

Collecting sales tax can be one of the most daunting aspects of running a business for entrepreneurs. If your business sells goods, or in rare cases provides certain services, there are many variables you must pay attention to that go into calculating sales tax like your customers, employees, place of business, property, and type of goods sold.

You need to have your legal ducks in a row, though, and that means making sure you collect and pay the proper sales tax on the items you sell. We’re here to answer some of the fundamental sales tax questions that plague small business owners, and explain how sales tax affects your business.

Where is Your Business Nexus?

In figuring out what sales tax to collect, you’ll need to consider the places where your business has a presence. This could include locations where you have an office, store, employees, or warehouse, depending on the specifics of how the states involved define a business presence, or, as it’s known in legalese, a nexus.

If your business has a physical presence in a state that imposes a sales tax, or otherwise operates in a way that the state defines as having a nexus, you’ll have to collect sales tax on purchases shipped there.

Most U.S. states and many municipalities impose sales taxes. Only Delaware, Montana, New Hampshire, Oregon and parts of Alaska don’t levy them. TaxJar, which helps e-commerce sellers manage sales tax, provides a state sales tax map for an easy way to view the laws governing each state. You can also check with your state and local revenue departments to see what sales tax laws apply to your business and to apply for a permit to collect them.

In most, if not all, cases, to stay on the right side of the law, you’ll need to obtain a state sales tax permit in your home state and other places where you have nexus before you can start collecting taxes from customers.

If you don’t have nexus in a state, you don’t have to collect sales tax on purchases from customers there, TaxJar.com notes. In other words, if you’re selling and shipping goods from one state and have no business presence in another state, you won’t have to charge sales tax to your out-of-state customers.

Do I Need To Charge Origin- or Destination-Based State Tax?

In addition to determining your nexus, you’ll also need to find out if your business’s home state requires you to collect an origin-based or destination-based sales tax from in-state customers. 

Origin-based states require sellers to charge the rate in effect at the seller’s location – including any local and county sales taxes.

However, a majority of states are destination-based, which means they expect retailers to charge in-state shoppers the combined state and local sales tax rate in effect at the address where the order is headed.

What Are Taxable vs. Non-Taxable Goods?

Consider, also, the goods and services you’re selling. In many states, certain items are tax-exempt. In Pennsylvania, for example, grocery store food, most clothing, U.S. flags, school textbooks, and dry cleaning are among the goods and services exempt from the state sales tax. Sounds simple enough, but consider this: If you had a Pennsylvania pastry shop, you wouldn’t charge sales tax on cold, bottled coffee or coffee beans, but you would need to tax a cup of hot, brewed coffee.

Non-profits like charities, religious organizations, schools and civic groups typically don’t pay sales tax if they provide a tax-exemption certificate or number, but don’t assume that’s the case without checking. Regulations governing non-profit tax-exempt status and sales vary by city and state.

Unfortunately, there’s not a one-size-fits-all answer to determining how much sales tax to charge your customers. For specific assistance, you can consult a tax or business advisor.

When Do I Need To Pay Sales Tax?

Once you’ve figured out what sales taxes to charge, you’ll have to turn around and pay them to any relevant state, county, and local taxing authorities.

Check with these agencies to find out if you have to submit sales tax returns yearly, quarterly or monthly, then stay on schedule to avoid paying penalties and interest – and potentially earn a bonus for your diligence.

More than half of states in the U.S. discount the amount of taxes due, letting you keep a percentage if you pay on time. Depending on the state and amount of taxes owed, your reward for timely filing could be less than $50 or several thousand dollars a month.

Keep your eyes open for any changes to sales tax laws, procedures or due dates that may affect your business.

If sales tax requirements seem like too much of a puzzle, consider using a sales tax integration tool that works with your point of sale (POS) software (like QuickBooks) to help keep your sales and sales tax in sync, which automatically calculates thousands of state, city, and county sales tax rates and helps you keep track of payment due dates to avoid penalties. You can also turn to a savvy tax professional or any number of apps and services to help you handle the task.

Collecting and paying sales taxes is just one of the many moving parts that goes into managing your business’ finances. At BookKeeping Express, we can suggest POS systems that work for your business, and track your sales to make sure they’re properly accounted for. Contact us for a free consultation.