Whether you run a brick and mortar business or an ecommerce business, you have to deal with charging sales tax. How and when to charge sales tax has always been a confusing issue for business owners. And since more people are now running both an ecommerce operation in tandem with a brick and mortar operation, the issues are even more confusing. Here are the answers to some of the more commonly asked questions about charging sales tax.
Must You Charge Sales Tax?
The questions of whether you need to charge sales tax has to do with whether your business is required to pay sales tax. The reason why businesses charge sales tax in the first place is so they can turn around and hand it over to the state. Once you understand this process, it’s easier to figure out if you must charge sales tax.
If you do business in a state that has no state sales tax, then your business won’t ever be required to pay that sales tax to the state. Currently, there are five states that have no sales tax. They are New Hampshire, Delaware, Oregon, Montana and Alaska.
Now, if your business is incorporated in a state that has sales tax, but your operations are in another state, the question of whether you must charge sales tax gets stickier. Let’s say you incorporated in Delaware, a sales tax free state, but you run your business out of Florida, where sales tax is currently 6%. Even though Delaware isn’t going to require you to pay sales tax, the state of Florida will. So you do need to charge sales tax on goods and services sold. Wherever your business’s physical presence is (called a nexus), that’s the state where you have to adhere to sales tax requirements.
Do You Have to Pay Sales Tax on Services Sold?
The proliferation of digital goods sold online has made many newer business owners confused about their sales tax obligations, too. For instance, let’s say you sell online courses through a platform like Lynda, Teachable, or something else. Or maybe you sell downloadable files from your website. Depending on where your business is physically located, you’ll be responsible for paying sales tax to that state’s government. So even though technically you don’t have a physical presence because your business is just a website or you operate through a platform, wherever you file is where you have to pay sales tax if applicable in that state. And, if you run a service-oriented operation such as a plumbing service or an event entertainment service, you also must pay sales tax for wherever your state of operations is, if applicable.
What Are The Exceptions to These Rules?
The biggest exception is that if you are selling to a consumer who is located in a state that doesn’t charge sales tax, then you don’t have to charge them sales tax, even if the state where you do business does charge sales tax. An easy way to think about is, sales tax is the responsibility of the buyer, not the seller. You’re basically collecting sales tax on behalf of the state where the consumer is located. So, if they live in one of those five states without sales tax, your customer doesn’t need to pay it to you, whether they’re buying a physical product or a digital product.
Another big exception is that each state has different laws about which products and services are taxable and which aren’t. For example, currently only 24 states charge sales tax on internet transactions. Further, most of those only collect if the seller has a minimum of $100,000 in sales in a tax year, or over 200 internet transactions. Your CPA can help you to determine if your business is required to pay sales tax on internet transactions.
How Should You Collect Sales Tax?
Sales tax should be collected at the point of sale, added on to the regular price of the goods or service. When your bookkeeper enters the transaction into your records, they should separate out the tax income from the sales income.
How Should You Pay Sales Tax?
You’ll first need to register in each state in which you sell goods or services. The State Department of Revenue is the department where you need to register your business. Next, you need to figure out the tax reporting requirements for each state. If you sell online to numerous states, this will prove to be a complex and time consuming task. Most business owners that sell online have set processes in place so they can efficiently keep track of each state’s sales tax liability for the tax years.
What’s the Best Way to be Able to Pay Your Sales Tax Liability?
Remember that technically, you are just holding the sales tax money until you hand it over to the relevant state government. It would be a mistake to mentally count sales tax income as part of your regular business income. Make sure that any bookkeeper you hire understands sales tax liabilities and how to handle that income as it comes in. This way, when you file and have to pay that sales tax, it’s already sitting and waiting for you to pay it to the relevant state.
State sales tax is one of the messier parts of doing business, but it must be addressed. Your CPA will prove to be invaluable when it comes to tracking and paying your state taxes each year. Set aside some time to talk to your CPA about be best way to organize this part of your business so that when tax time rolls around everything is as organized as possible.