How To Collect, Report, and Pay State Sales Taxes
If your business sells a product or provides a service that is taxable, and if you are in a " sales tax" state, you will need to set up a process to collect and pay sales taxes and file sales tax returns periodically.
If your business is selling in Alaska, Delaware, Montana, New Hampshire, or Oregon, no sales tax is charged, so you don't have to worry about this process. Lucky you.
The Complexity of Sales Tax
Sales taxes are, frankly, a mess. There are many taxing localities involved, each with its own tax rate and list of taxable products and services. If you have a tax presence (called a tax nexus) in different states, you may have to collect different taxes on different items. And if you sell online, trying to figure out if you have to collect sales tax from customers in many states becomes almost impossible to manage.
To help you sort this out, this article contains the steps and decisions you will need to go through in order to collect, report, and pay sales taxes on the products or services you sell. Here are the main steps in the process of preparing to collect, report, and pay sales taxes:
- Begin by determining whether you must collect sales taxes in a specific state.
- Begin by registering with your state's taxing agency. If you sell in more than one state, you will need to register in each state. Your state will also have information on what products and services are taxable.
- Determine the sales tax rate or rates you must charge. It has been estimated that there are 11,000 tax collection entities in the U.S., so determining and collecting sales tax can be very complex The Tax Foundation has a downloadable table of state sales tax rates.
- Set up your processes to collect sales tax from your customers. You might be selling online, at a retail store, or at outside venues like flea markets and events.
- Gather your records for all your sales and the taxes through your business accounting system.
- Send reports to your state and, of course,
- Pay sales taxes to your state as required.
Determine Your Requirement to Collect Sales Taxes in a State or States
Your requirement as a business to collect sales taxes from your customers depends on these factors:
- If you have a tax nexus in that state.
- If the products or services you sell are taxable in that state
- If you sell online, you will need to look up the specific requirements for collecting sales taxes as an online seller in each state.
State Sales Tax Registration
After you have determined that you must collect sales tax in a specific state, go to the website of that state's taxing authority and register for your sales tax permit. The permit will allow you to collect, report, and pay sales taxes on taxable items. You will first need to have your Federal Employer ID Number and all of the information about your business and its owners. Most states allow online registration, so have all the information ready before you begin the process.
Determine Which Products or Services are Taxable
Not all products and services are taxable in all states. More states are adding more products and services to the list of taxable items. In addition, states are trying to determine what is a service and what is a product. For example, if a CPA does business taxes, is that a service or a product? Different states answer this question in different ways.
Determine the Sales Tax Rate to Collect
The sales tax process is complex, because there are many localities (state and local) who have sales taxes, each has its own sales tax rate, and different ways of determining tax - origin-based or destination-based. Some states are origin-based (meaning the sales tax is charged from the seller's location) and other states are destination-based (the sales tax is charged from the buyer's location). Some states, like California, have both origin-based and destination-based sales tax localities.
The rate changes, depending on your location. If you are selling in multiple locations, you must include the correct sales tax for each location. For example, if you are selling products in several cities or counties within your state, the correct amount must be collected from each locality. This gets complex if you have many places where your products are being sold. If you are selling in several states, you must also program the correct amount for each location within each state.
Collect Sales Taxes from Customers
After you have received your sales tax permit, you can begin collecting sales tax from customers. You must show the tax amount separately, so the customer can see the amount of the tax; this typically isn't a problem, since most sales receipts are programmed to show the amounts. If you are selling online, your "shopping cart" page will show the sales tax calculation. You will need to program the computer for the applicable sales tax amount or amounts.
Check on Sales Tax Exemptions
In some instances, the products you are selling may be exempt from sales taxes. These exemptions also apply if you are selling a tax-exempt product. You may also want to look into getting a sales tax certificate if you think your purchases of items for resale might be exempt. The process of getting this exemption certificate and the requirements are different for each state.
- Products purchased for resale and raw materials.
- Non-profits. Some non-profits in some states may be able to get a sales tax certificate to be exempt from sales taxes on some products.
If you are presented with a sales tax certificate from a customer, you should make a copy of it and keep it in your business records, so you can present it if audited by your state
Collecting Sales Taxes for Online Sales
If you have an online business, including an online auction business (like an Amazon seller or eBay seller), you may be wondering if you must collect sales tax for online transactions. The simple answer is that you must charge sales tax for in-state sales. Charging sales tax for out-of-state sales varies by state. It depends on your state and your tax status within the state.
The online sales tax issue is constantly changing. Many states are using tax nexus in a broader way to require affiliates of online companies like Amazon to collect sales taxes.
Keep Records on Sales Taxes Collected
After you have collected the sales taxes, you must keep records on how much you have collected (these amounts go into the "Sales Tax Payable" liability account, in your accounting system. If you have an online accounting system, like QuickBooks, you can set up sales transactions to automatically post to this account.
Report Sales Tax Information to Your State
In addition to paying the state sales taxes you owe, you must also file periodic sales tax reports to your state department of revenue.
Most states now give you the ability to pay and report sales taxes online. Take advantage of this feature if you can.
Pay Sales Taxes to Your State
Check with your state to see when you must pay sales taxes. The frequency of payment depends on the volume of your sales. In most states, you must pay monthly if you have a high volume of sales, but at least quarterly in almost every state. Be sure you pay on time to avoid fines and penalties for late payment.
Some states give a discount for prepayment of sales taxes. This is definitely something to look into if possible.
Some Tips on Sales Taxes
- Sales taxes are determined based on location - either the location or the buyer or of the seller. Which one depends on your state. Check with your state's revenue agency for more information.. Check the most up to date state sales tax rates to be sure you are charging the full amount of the tax.
- If someone wants to buy from you and says they are a "reseller" or that they are buying for "resale," they need to show you a valid reseller's permit. Make sure to keep a copy of this permit in case you are questioned by state sales tax agents.
- If you do business in several locations, within and between states, or you sell online, you might want to use an online sales tax service like TaxJar or Avalara.
For more information, see this article with answers to common questions about sales taxes.