What is US Sales Tax?
At its heart, sales tax is just a way for the governments of each state in the United States to raise money. Depending on which state government you’re dealing with, sales tax is used to pay for things like schools, roads, and other municipal projects.
To make things even more interesting, there is no such thing as federal sales tax in the US. It’s all governed at the state level. Sales tax is enforced by 45 states and Washington DC. That means that online retailers have to juggle 46 varying sets of rules, laws, and due dates.
What Goods are Subject to US Sales Tax?
In most US states, almost all tangible property should be taxed. However, more and more states are taxing certain services, too. There are some notable exceptions. Depending on the state, certain purchases may be tax exempt--such as groceries or clothing. Be sure to check individual state laws for those exemptions.
Where Should You Charge Sales Tax?
When you’re checking up on state sales tax percentages, you may be wondering which tax laws apply to your business. That’s where the “sales tax nexus” comes into play. As an online retailer, your sales tax nexus is a place you have a significant connection to. There are several factors that can determine a nexus:
- Physical locations--where your offices, stores, warehouses, or factories are located
- Workers--where you employee employees or staff for your business
- Inventory--where you store your goods
- Affiliate--where another party sends you sales in exchange for a fee or percentage
As you can see, there are lot of opportunities to establish a nexus state. You’ll always have a nexus in your home state. However, it’s also possible to have several other ones across the country.
Again, it’s important to remember that the laws will vary by state, so you have to know what the requirements are in the various states you might do business in. A great place to start is our state-by-state guide to nexus factors.
How to Register for a Sales Tax Permit
The next step is to get a sale tax permit for each nexus state you've determined. Do not skip this step! It is unlawful to collect sales tax without a permit and you could end up in some hot water if you don’t get a permit before you start making sales.
Sales permits are generally distributed through the state’s taxing authority. (It’s usually called something like the state Department of Revenue or State Tax Commission.) The problem here for non-US sellers is that many state tax departments are not set up to serve non-US based taxpayers. That’s why we recommend speaking with a vetted sales tax expert if you have any trouble registering for a US sales tax permit.
How to Set Up Sales Tax Collection
Now that you’ve worked out your nexus states and gotten sales tax permits for each of them, it’s time to start collecting! As an online retailer, you’ll probably using a store cart or marketplace to process transactions. Be sure that it’s also collecting tax for each one of your nexus states.
Fortunately for us, most shopping carts and marketplaces have sales tax collecting engines. All you have to do is input some basic information and the tool will do the rest. We have some comprehensive guides on the most common shopping carts and marketplaces out there. They can get you started in the right direction.
How to Report and File Sales Tax
Once you’ve collected your sales tax, it’s time to report it. But it’s not as simple as adding it all up and sending it over with a big bow. You’ve got to break it down by nexus state and then you’ve got to break it down even further into city, county, and other special taxing districts. Those funds go to different places and the state taxing authority doesn’t automatically know where each of your sales occurred. It’s your job to tell them.
Want to save some money? Many states allow sales tax filers to keep a small percentage of the sales tax they collected as a reward for filing on time. The percentage of sales tax discount and the filing deadlines vary, of course. But it can be an easy way to shave some money off of your tax bill.
Also, don’t think that just because you didn't make any sales you that you don't have to file. Most states require that you file a sales tax return whether you collected sales tax or not. These are called "zero returns.” Failing to file them can result in penalties and fees. You’ll go from owing nothing to owing something just by missing your filing date.
If this all sounds a little complicated and time consuming. . . . well. . . that’s because sometimes it can be.
But this is where TaxJar steps in. We break down how much sales tax you've collected by state, city, county, and other special taxing district and provide you with a return-ready sales tax report just the way the state wants to see it. And if you never want to see another state filing again, we can we'll AutoFile your sales tax returns for you in every state.
And that’s it! Once you’ve filed and paid your sales tax, you’re done. . . until the next deadline rolls around.
Guest post by Jennifer Dunn, Chief of Content, TaxJar
TaxJar is a service that makes sales tax reporting and filing simple for more than 10,000 online sellers.