Almost every business that sells a product, and many businesses that sell services, must deal with sales taxes - collecting, reporting, and paying it. And the internet sales tax situation is constantly changing.
Everything you always wanted to know about sales taxes, including how to register for sales taxes, what products and services are taxable, tax rates in each state, sales tax vs. excise taxes, sales taxes vs. use taxes, sales taxes in online transactions, and sales taxes on out of state sales.
To begin, here's a checklist of questions you will need to answer about your business to see if you must collect, report, and pay sales tax for your business transactions:
The first step in determining whether your business has to collect sales taxes is whether your company is "doing business" in a particular state.
Five states currently have no statewide sales tax: New Hampshire, Delaware, Montana, Oregon and Alaska (but Alaska allows municipalities to impose a sales tax).
At the basic level, your state decides whether you must collect sales tax in that state. A state has the power to tax a business if the business has a nexus (physical presence in that state.
Some business activities that could create a nexus for your business in a state, and require you to collect sales taxes are:
- Having an office, distribution center, or warehouse,
- Having a representative, agent, salesperson, canvasser, or solicitor,
Selling online over a specific gross sales or number of transactions in a state could cause you to have a nexus in a state and mean you would have to collect sales tax. The gross sales and transaction minimums differ for each state.
What is the Sales Tax Rate in My State?
The sales tax rate is the percentage of purchase for state and local sales taxes. The rate varies by state. This article by the Tax Foundation gives the state and average local sales tax rates for each state (2020).
After you have figured out if you have a sales tax nexus in your state, and you know the sales tax rate, the next step is to find out whether the products or services you are selling are subject to sales taxes.
When sales taxes began in the 1930s, sales taxes were only collected on products, but states are taxing services. Hawaii, New Mexico, and South Dakota impose sales taxes on all services.
Each state has its own list of taxable products and services, and the state laws on what's taxable are always changing.
Is it a product or a service? In today's changing business environment, it's sometimes hard to tell. For example, if your company sells web design, is that a product or service. Many states use what's called a true object to text to decide whether a transaction is a taxable sale of tangible personal property (a product) or a nontaxable sale of services. The test asks whether the purchaser's "true object" was to acquire a finished product or a service.
If you are selling online to customers within your state, you must charge them sales tax.
If you have a "presence" in another state, you must also charge sales tax. A recent Supreme Court case (South Dakota vs. Wayfair) determined that a seller can require online sellers to collect sales taxes even if they don't have a physical presence in a state.
Check this article by the Streamlined Sales Tax Governing Board for the guidelines for each state for sales taxes, including the remote seller threshold.
How Do I Register With My State Taxing Authority?
To begin to collect sales taxes in your state, you will need to register with your state's taxing authority.
You may need to apply for a seller's permit if:
- You have a physical officer or a place where you conduct business (like your home)
- You sell or ship products to a buyer in the state
- You have a distribution location, like a warehouse or storage area
- You have employees physically present in the state, including independent contractors, salespeople, representatives, or agents
In addition, you may need to get a sales tax permit if you sell online and you have either of these two circumstances:
- You have a minimum number of remote transactions into the state, or
- Your business makes over the minimum amount of dollars in sales each year.
This IRS article has information about all 50 state government departments, including a direct link to the state's taxing authority.
Some states require you to register using the Streamlined Sales Tax Registration System (SSTRS).
Two important pieces of information you will need to register:
Your federal business tax ID number (Employer ID Number),. You apply for this number from the IRS.
Your NAICS Code or Codes. These are universal codes for all of the products and services you sell. You can use the lookup feature on the NAICS website to get these codes.
How Do I Collect, Report, and Pay Sales Taxes?
The process of collecting, reporting, and paying sales tax differs in each state, but you can find out how in general the process works by reading this article.
Many home business owners assume since they are selling from home their sales are not taxable. Not true; if the product or service you are selling is taxable, you must get a seller's permit and collect, report, and pay sales taxes.
Do I Have to Collect Sales Taxes on Out of State Sales?
Out of state sales are complicated, and there are many different circumstances you need to consider if you have a nexus (presence) in other states. Learn about some of the common circumstances in this article.
How Do I Find Out Sales Tax Rates?
Sales tax rates change for each state and each locality within each state. Learn about local option taxes and how you can find out tax rates by zip code.
What are Local Option Taxes?
Many states (34) allow localities to charge an additional "local option" sales tax on top of the state's general sales tax. Usually, these local option taxes are for specific purposes, like school funding or flood recovery. If you sell to customers in various localities, you will need to know the local option tax for each locality where the customer is located; see this article for a site that allows you to search for local option taxes by zip code.
What is a State Sales Tax Holiday?
Many U.S. states have sales tax holidays, which a few days a year are set aside to allow people to buy certain items without paying sales tax. This "holiday" is a benefit for merchants who sell these items (clothing and back-to-school items are featured in many states) and, of course, for the customers.
This article by the Tax Foundation lists the state tax holidays for each state, with the products "on holiday" in that state.