As a product seller, chances are high that one of your least favorite administrative hassles is dealing with sales tax. Collecting, reporting and filing sales tax is just one of those necessary evils you must master in order to get on with the fun and profitable parts of your business.
If you dread sales tax when your due date rolls around, or are just getting started, this guide will help you finally feel confident about sales tax!
Let’s dig in.
What is sales tax?
Sales tax is a small percentage tacked on to the sale price of a product or products. In the United States, forty-five states and Washington D.C. all have a sales tax. Sales tax is governed at the state level rather than the federal level, so each state gets to set it’s own sales tax rates, due dates, rules and laws.
Retailers (including online sellers) are required to collect sales tax when you make a taxable sale. Most tangible items that you sell will be taxable. In general, services are not taxable, though some states are attempting to change that.
Sales tax rates vary by state and local area. A few friendly states only have one statewide sales tax rate. But most states also allow local areas such as counties, cities and special taxing districts to collect sales tax as well. This makes sense when you realize that state and local governments use sales tax to pay for necessary budget items like schools, roads and public safety.
As a retailer, however, you need to make sure you’re collecting the correct amount of sales tax in each local area.
The Colorado state sales tax rate is 2.9%. But local areas are also allowed to tack on extra sales tax. If you were a merchant located in Centennial, Colorado, here is the combination of rates you should charge your customer:
|Colorado State Rate||2.9%|
|City of Centennial||2.5%|
|Regional Transportation District Tax||1%|
|Scientific and Cultural Facilities District||0.1%|
Now that we know what sales tax is and why we’re required to charge it, let’s move on…
Who has to charge sales tax to which customers?
As a retailer, you are only required to collect sales tax from buyers in states where you have sales tax nexus. Sales tax nexus is just a fancy legalese way to say “significant connection” to a state. If you have nexus in a state, then that state considers you on the hook for charging sales tax to buyers in the state.
You’ll always have sales tax nexus in your home state, but you may find that certain business activities create nexus in other states, too. They include:
- A location – an office, warehouse, store, or other physical place of business
- Personnel – an employee, contractor, salesperson, installer or other person doing work for your business
- Inventory – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
- Affiliates – Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
- A drop shipping relationship – If you have a 3rd party ship to your buyers, you may create nexus
- Selling products at a tradeshow or other event – Some states consider you to have nexus even if you only sell there temporarily
To help you determine whether or not your business activities give you sales tax nexus, you can find out what every state’s laws have to say about nexus here.
If you do have nexus in a state, your next step is to…
Register for a Sales Tax Permit
Before you can legally begin collecting sales tax from buyers in a state, you are required to obtain a sales tax permit. You can do this with your state’s taxing authority, usually called the [State] Department of Revenue. Here’s information on how to register for a sales tax permit in every state.
When you receive your sales tax permit, you will also receive instructions on when to file and at what frequency.
Most of the time, you will be required to file sales tax either monthly, quarterly or annually. The general rule of thumb is that the higher your sales volume in a state, the more often the state will want you to file a sales tax return and remit sales tax due.
Now that you have your sales tax permit in hand, your next step is to begin collecting sales tax from your customers.
How to collect sales tax as an online retailer
Most online platforms allow you to collect sales tax from your customers, though some platforms are more robust than others when it comes to allowing you to collect the correct amount of sales tax.
Origin vs. destination-based sales tax collection
Long story short – a handful of states are “origin-based” sales tax states. If your business activities are based in one of these states and you sell online, you’re in luck. When selling to buyers in your state, all you need to do is collect sales tax at your local rate. This means you only need to collect sales tax at a single tax rate (Example: 6.5%) if you are fortunate enough to live in an origin-based state.
On the other hand, most states are “destination-based” sales tax states, which can be a real nightmare when it comes to collecting sales tax. In destination-based states, sellers are required to collect sales tax at the rate of the buyer’s ship-to address. States can have hundreds or thousands of local taxing jurisdictions. Remember, each county and city may have a sales tax, plus any special taxing districts. This is where collecting the right amount of sales tax can get a whole lot more complicated.
To even further complicate matters, most of the time you are required to collect sales tax using destination-based rules in any state aside from your home state. You can read a much more detailed explanation of origin vs. destination based sales tax collection here.
When collecting sales tax, you should also keep your product’s taxability in mind. Most tangible products are taxable, but some states make exceptions for necessities such as grocery items or clothing. If you have sales tax nexus in more than one state, you may find that you charge sales on clothing to buyers in one state, but should not charge sales tax on clothing to buyers in another.
Also, if you charge your customers for shipping, you may also need to consider sales tax. Some states require sales tax on shipping charges, and some do not. Here’s a list of states that do and do not require sales tax on shipping charges.
If this all sounds overly complicated, don’t worry. Even if you have built your own online store, or use a shopping cart like Magento, a smart sales tax collection solution like TaxJar’s SmartCalcs sales tax API has you covered!
Once you’re collecting sales tax, your sales tax filing due date will roll around before you know it. When that happens…
Report how much sales tax you’ve collected
When it comes time to file your sales tax return, your first step is to figure out how much sales tax you collected from buyers in your state. This includes breaking down how much sales tax you collected from buyers in each city, county and other special taxing jurisdiction. As you can imagine, this gets more difficult the higher volume you are or if you sell through multiple online channels.
Sales tax automation can help here, too. Just link up all of you sales channels – from marketplaces like Amazon FBA or Etsy, to shopping carts like Magento or Shopify, or even a POS like Square – and technology will take care of the rest. We’ll product a return-ready report that you can use to fill out your sales tax filing forms in minutes, not hours.
If you truly never want to see a sales tax return again, you can also AutoFile your sales tax returns in most states. This allows you to spend time on the parts of your business that truly matter.
Once you’ve determined how much sales tax you’ve collected in your nexus states (either with a sales tax automation solution or tediously, with a complicated spreadsheet) your next and final step is to…
File your sales tax return
When you registered for your sales tax permit, your state gave you a sales tax filing frequency and due dates. You can check your sales tax filing due dates here.
When it’s time to file, you can file online at your state’s department of revenue, or AutoFile using a sales tax automation solution.
There are a couple of important things to consider when filing your sales tax returns:
- Always file a sales tax return by the due date – This is true even if you didn’t collect a penny in sales tax. States consider your sales tax filing a “check in” and if you fail to file you may end up with a monetary penalty or even having your sales tax permit revoked.
- Don’t discount discounts – About half the states with a sales tax realize that asking you, the retailer, to serve as tax collector places and extra burden on your business. If you file on time, they’ll allow you to keep a small percentage (usually 1-3%) of the sales tax you’ve collected. It isn’t much, but it’s free money!
And that’s it! You’ve filed your sales tax return and you’re all set. Need more info? Check out our Sales Tax 101 for Online Sellers Guide, or join over 6,000 of your fellow sellers and sales tax experts over at the Sales Tax for eCommerce Sellers Facebook Group.