You have just started a home-based business and someone has told you that you must collect sales taxes on sales. You must figure out how to do this, on every taxable transaction.
In some ways, a home business collects sales taxes in the same way as other businesses, but a home business has some unique issues to deal with when collecting sales taxes.
Here are some tips to help you collect sales taxes:
How Businesses Collect Sales Tax
Every business must collect sales taxes on the products and services that are subject to sales taxes in your state. As you start your business, the first thing you must do is determine if your products or services are taxable, the tax rate, and the difference in taxes if you are selling to individuals in different parts of your state.
Go to the website of your state's Department of Revenue or taxing agency (it might be called something else in your state). You can find information on whether your products or services are taxable (most products are; many services are), and the tax rates in all localities in your state.
You will also need to register to collect sales tax in your state; in most states, you can register, submit reports, and submit taxes due online through this state agency.\
To figure out your responsibilties to pay sales taxes, you will need to:
- Figure out if your state collects sales taxes (most do)
- Determine if your state has origin-based or destination-based sales taxes
- What the sales tax rate is (including local rates)
- What specific products or services are taxable.
This list is expanded and explained more in this article about products and services subject to sales taxes.
Sales Taxes on Internet Transactions
The question of collecting taxes on internet transactions has been confused for several years, but a recent Supreme Court decision has turned the issue of who has to pay internet sales tax back to the states. The various states now have the right to require online sellers to charge and collect sales tax to buyers in their state.
Most states that tax online transactions have exempted smaller sellers. Depending on your state's limits, smaller online sellers may be exempt from collecting sales tax if they have less than $100,000 in annual sales or fewer than 200 transactions. This exemption varies from state to state.
If you are selling online, you should make sure your "shopping cart" software allows you to insert state and local sales taxes for online transactions from customers outside your state. Most of these companies are fairly up to date on the current requirements.
Options for Collecting Sales Taxes
When you have set up your sales tax account, you can begin collecting these taxes from customers.
If your customers come into your home, you can include the taxes on the customer's bill.
If your customers don't come into your home, you will need to collect remotely, either on the internet or by getting a credit card number by phone.
Sales Taxes on In-person Transactions
In-person transactions are the easiest to deal with. Let's say you have an in-home beauty salon. You will need to know the sales tax rate at your place of business (your home) and charge that to everyone who comes in. (This assumes that beauty services are taxable in your state).
Keep Up to Date on Sales Tax Rate Changes
Register with your state department of revenue to receive emails and reminders about sales tax rate changes, for both the state and for localities where you do business.
Learn About Changes in Affiliate Status
If you are an affiliate selling for another company online, many states are now requiring sales taxes to be collected from sales-tax eligible products or services you sell. Registering with your state department of revenue should give you information on tax law changes on this subject.