If you are doing retail business in several states and you make sales in those states, do you have to collect sales tax?
Whether you must collect sales tax depends on several factors:
- The product or service you are selling.
- Where you are selling from (your business location), and
- Who you are selling to (the location of your customer).
In this article, we're looking only at the question of whether you need to collect sales tax. The question of how much to collect is not covered here.
Doing Business in a State: The Concept of Nexus
You (your business) must collect, report, and pay sales taxes in every state where you have a nexus (sales tax presence), for sales you made in that state. The determination of nexus is based on certain activities or physical presence in a state which require sales tax to be collected on taxable sales in that state.
Some possible ways nexus can be determined
Here are a few of the most common determinants of nexus for sales tax purposes:
- If you own or maintain an office, distribution house, warehouse, or other places of business, either directly or by a subsidiary
- If you are an out-of-state retailer that has a representative in the state (permanently or temporarily)
- If you have an employee representative who solicits sales in the state
- If you have an independent broker or jobber who is under contract with your company to solicit sales in the state
- If you have an employee or representative who acts as your consultant and who provides regular and significant services to a customer or customers in the state
- If you sell and install property in the state
- If you are a construction contractor performing a contract, in whole or part, within the state
- If you are a retailer that performs service work in the state
- If you regularly engage in the delivery of your products by your own trucks in the state.
How to Determine If You Have a Nexus in a State
State laws regarding nexus and the concept of "doing business" in a state vary widely from state to state. The only way to find out if you may have a nexus in a state is to check with that state. This means that if you are doing business in several states, you will have to check on each one.
An Example of the Search Process in a State
If you are doing business in Kentucky, for example, go to the website for the Department of Revenue for that state (it might be called something different). Look up the term "nexus" or "remote retailer" or "doing business," to see how Kentucky defines the term. Decide if your business presence in Kentucky meets the requirements for a nexus. If you are not sure, you might need to call the state to get a determination. Some states will ask you to fill out an online form to get more information before they give you a determination.
Sales Taxes Based on the Location of Buyer or Seller
Whether you must collect sales taxes on transactions also may be determined by whether your business is in a state which collects sales taxes based on origin or destination. 11 states tax by origin, meaning that the seller's location determines the tax rate. The rest of the state's tax by destination, meaning that the buyer's location determines the tax rate. California has a mixed rate.
Products and Services Subject to Sales Taxes
As noted above, in addition to determining whether your business has a tax presence in a state is only one part of the question. You must also find out if the products or services you are selling are taxable. Most products are taxable, but each state has tax-exempt items such as prescription medication and food items. More and more states are taxing services too. You will need to check with your state department of revenue to be sure.
State Laws and Sales Taxes for Online Businesses
State laws for collecting sales taxes for online businesses are changing all the time, as more states are requiring that sales taxes must be collected for all online transactions. Make sure you investigate your state's internet sales tax laws.