What are the basics?
If you sell products and/or services in a particular state, you are likely required to collect sales tax from your customers. Here is a brief breakdown of some of the sales tax and licensing requirements you could be responsible for:
- State sales tax. This varies from state to state, and some states don't require that you collect a tax at all. Know your state's taxation requirements and regulations. If you sell products in multiple states, you would be smart to collect sales tax in every state in which you have nexus (more on that in a bit).
- Sales tax permits. If you sell products, you'll have to get a sales tax license or permit from your local State Department of Taxation/Revenue. It is a serious violation to operate a small business and sell products without applying for this license or permit.
- Local sales tax. Some cities and counties require that you charge a local sales tax on certain products and services. Check out taxfoundation.org to see what rules apply in your local city and county.
- Internet business sales taxes. Most online businesses can sell goods without having to charge or collect sales tax. However, if you sell products or services in a state where you have set up a "physical presence," such as an office, you likely need to collect sales tax from customers in that state.
In a nutshell, if you have nexus with a state, you will almost certainly have to collect sales tax. Nexus means that within a state you meet at least one of these criteria:
- Your business has a physical location.
- Your employees reside and work in the state.
- Your business has property (including intangible property, such as trademarks, copyrights and patents) in the state.
- Your employees regularly solicit or perform business functions in the state.
Furthermore, each state has varying statutes that could require you to collect sales tax on your products or services. Visit the state's Department of Taxation/Revenue for any state in which you transact business. Make sure, while you are on the site, that you complete a search for "tax code" or "tax statutes" that could apply to you.
Additionally, find out if your business is located in an "origin-based" state where you collect tax at the state and local tax rate where the purchase occurs, or if it’s a "destination-based" state where you collect tax at the state and local rate of where the product will be shipped and used; click here to determine how much you should collect.
What goods apply?
Every state has different guidelines, but generally, the sales of tangible personal property (TPP), or goods and products that you can physically handle, are taxable. Sales of service-only transactions are widely non-taxed, but you should consult the State Department of Taxation/Revenue for a definitive listing of taxable, non-taxable and exempt products and services.
Also, if your business sells certain products (for example, food, petroleum products, telecommunications or services), you will need to apply special tax rates and file potentially supplemental tax returns in addition to the "standard" state sales tax return.
Lastly, in addition to the types of goods or services that are taxed or not taxed, certain customers are privy to tax exemptions. Generally, federal government, schools, libraries, churches and non-profit organizations’ purchases are exempt, and state and local government purchases are mostly exempt. A good listing of sales-tax exemptions by state can be found here.
How do you collect sales tax?
The easiest way to add sales tax to a transaction is to purchase automated checkout equipment, commonly referred to as POS (Point of Sale) or POP (Point of Purchase) terminals for your business. These systems include hardware and software that can be customized to your business' needs and will fully automate the process of not only customer checkouts but also will streamline customer returns. The software can also be integrated, so when tax rates change—and they change often—your system is updated automatically.
Finally, the biggest benefit of a good POS/POP system is that, as transactions occur, they are recorded to your financial record-keeping data. When you file your sales-tax return, you can easily extract the net sales-tax amounts. If you choose not to use an automated POS/POP, you must keep and track in detail all of the tax rates applicable to your business and manually add that tax rate percentage to the individual sales transactions as they occur. That can make record keeping more cumbersome and muddled, making the filing of an accurate sales-tax return difficult.