The rules and regulations of collecting sales tax can be a little bit confusing for small business owners. Whether you’re selling from a brick-and-mortar storefront or an e-commerce site, you need to understand how to collect and account for state sales tax.
How Sales Tax Works
Sales tax is established at the state and local level, and it’s imposed on purchases at the time of sale. Small business owners are responsible for assessing sales tax and collecting it from consumers any time a sale is made. They are also required to pass on the money collected through sales tax to state and local tax authorities.
Sales tax rates are different from state to state, and some states like Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon don’t charge a state sales tax at all. This can lead to some confusion for small business owners — especially those who sell products in multiple states.
How you pay sales tax will vary from state to state as well. You may be required to report your sales and submit owed taxes on a monthly or quarterly basis, depending on the tax laws in your location.
To further complicate things for business owners, there are certain instances in which a consumer is exempt from paying sales tax. These exemptions could include purchases made for resale and the purchase of raw materials (for example, if you’re buying products from a wholesaler to resell in your store or buying lumber for your furniture making business) and sales to non-profit organizations. If you’re selling to a non-profit organization and not collecting sales tax, you’ll want to have a copy of the organization’s tax-exempt certificate on file.
Determining Sales Tax for Online Purchases
Business owners that operate in one state and sell to a customer in another state are sometimes confused as to how to handle the collection of sales tax. The U.S. Small Business Administration offers this advice:
“If your business has a physical presence in a state (also known as a “nexus”), whether it’s a store, office, warehouse, employees, or other criteria established by your state, then you MUST collect sales tax from customers in that state. If you don’t have a presence in a state, then you are NOT required to collect sales taxes.”
You’ve probably seen this in action when buying from a website online yourself. If you buy from a retailer out of state, you aren’t charged sales tax on your purchase.
State and local governments take sales tax seriously, so it’s not a good idea to simply hope you’re doing it right. As an online retailer you can use shopping cart services that handle the question of sales tax for you. You can also consult with your small business accountant to make sure you’re collecting and submitting sales tax by the book.