Sales Tax 101 for Small Business Owners Who Sell Products

By Mark Faggiano

If you are an entrepreneur and you sell products, you have probably heard of the complexity that arises when it comes to dealing with sales tax. Collecting and remitting sales tax can be one of the most difficult and confusing aspects of your business. Questions range from “Who do I collect sales tax from?” to “How much do you have to collect, anyway?” We’re here to answer those questions.

Sales Tax 101

Sales tax is simply a percent of a total amount of a retail transaction that is charged to buyers at the point of sale. Forty-five states and the District of Columbia levy a sales tax on purchases, and they use that money to pay for things like schools and roads.

For example, if you own a boutique in Beverly Hills, CA and sell someone a hairbrush for $6.00, you will actually charge your customer $6.54 due to the 9% sales tax rate in the 90210 zip code.

You, as a product seller, are required to collect sales tax in states where you have “sales tax nexus.” States usually vary in how they define nexus, but in most states, it generally means that a merchant has a “significant presence” like a store, an office, a warehouse, or an employee in that state.

For example, if you live Rhode Island, have a warehouse in Vermont and you hired your cousin in Connecticut, you might have sales tax nexus in all three states. You can check with a state’s department of revenue if you have questions about nexus.

Collecting Sales Tax

As an entrepreneur, once you establish where you have nexus, the next step is applying for a sales tax permit. You can get one from your state’s taxing authority, which can usually be found searching for “[Your State’s] Department of Revenue.” Once you get your permit, you will also be given a schedule of when you will have to send the sales tax that you collect to the state.

The amount of sales tax that you are required to charge is based on a percentage of a transaction amount. Sellers are required in some states to charge sales tax based only based on the price of the items, while other states might require that sales tax be collected on shipping costs, too.

The sales tax rate can also vary by state, especially if some states have a sales tax rate, but they also allow localities to charge an extra percentage. To go back to the Beverly Hills example, the sales tax rate there is actually made up of the 6.5% California state rate, the 1% Los Angeles county rate, and a 1.5% district rate, for a total of 9%.

Online sellers should keep an eye out for origin and destination-based sales tax states. Origin-based sales tax states are pretty straightforward. Sellers are required to collect sales tax based on the location where their items are shipped.

On the other hand, in destination-based sales tax states sellers are required to collect based on where their products end up. For example, if you have nexus in Kansas, which is a destination-based sales tax state, you will have to figure out the sales tax rates for each of your buyer’s localities.

Handling Sales Tax

As a product seller, if you sell online or from several online platforms or if you have nexus in different states, compliance can be tricky. You must consider whether you are paying the correct amount on time or even if you are paying it correctly by jurisdiction. If you have nexus in a destination-based state, you will have to figure out which jurisdiction each buyer falls into when filing your sales tax return.

Fortunately there are solutions out there that make sales tax simpler. At TaxJar we hope that one day small business owners pulling their hair out over sales tax will be a thing of the past!

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Mark Faggiano
Mark Faggiano is the founder and CEO of TaxJar, a service built to make sales tax compliance simple for eCommerce sellers. Mark’s passion is solving complex problems for small businesses. He previously co-founded and led FileLater to become the web’s leading tax extension service for both businesses and individual taxpayers before being acquired in 2010.

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