Do I Need to Collect Sales Tax?
As a buyer, when I purchase something from a local business, I pay sales tax. I may not like the extra cost, but it's a pretty seamless transaction -- the seller just tacks on the appropriate percentage, and I pay the total amount. But what happens when I'm the seller?
How do you, as a businessperson, know whether you have to collect sales tax? Here's the short answer: collect sales tax on most goods and some services that are delivered to a customer in any U.S. state in which you have any physical presence.
The long answer is much more complicated. Sales tax rates and rules vary from state to state, city to city. There's truly a hodgepodge of laws and taxing authorities: according to the National Retail Federation, 45 states and 7,500 cities, counties, and jurisdictions impose sales taxes.
What's a small business to do? Here are a few of the most asked questions about sales taxes:
Q: Who pays and collects sales taxes?
States call these taxes by various names: sales tax, franchise tax, transaction privilege tax, use tax, and more. Some are the responsibility of the seller, others the buyer's responsibility. But governments figured out that it was easier and more reliable to make the seller collect the tax than to get individual consumers to send in tax on every purchase. So, businesses are typically responsible for collecting sales tax and sending it to the state.
Q: What kind of paperwork must I deal with?
Generally, if you're going to collect sales tax, you must get a license from your state. On each taxable transaction, you calculate the applicable sales tax, collect it from the buyer, keep tax records, and then file a tax return and pay the taxes to your state. You'll pay monthly, quarterly, or annually, depending on your level of sales.
Q: What kind of products are subject to sales tax? Which are not?
Each state makes its own rules. Typically, most products sold to end users are taxable. Major exemptions:
- prescription drugs;
- food, especially groceries and non-prepared food;
- animal feed, seed, and many agricultural products;
- products for re-sale - raw materials, inventory, other items that are going to be sold, rather than used, by your customer.
Q: Do I have to charge sales tax if I'm selling a service?
Once again, rules vary by state. Many states exempt services. And within a state, the rules can be inconsistent, even crazy.
Q: If I do business in more than one state do I have to collect taxes?
The US Supreme Court has twice ruled that states cannot require businesses to collect sales tax unless the business has a physical presence -- or "nexus" -- in the state. But "physical presence" is pretty loosely defined. If you have ANY location, facility, employee, call center, address, or even one independent sales person in a state than you have to collect taxes in that state.
Q: Do I have to charge sales tax if I'm making a sale on the Internet? Catalog sales?
The rules are the same for Internet sales and catalog sales: You have to charge and collect sales tax when you deliver the product to a state in which you have a "physical presence." Pending legislation, the Streamlined Sales and Use Tax Act, would require Internet (and catalog) companies in certain states (those choosing to participate in a standardized sales tax plan) to collect sales tax on purchases to customers in any participating state. However, businesses with less than $5 million of Internet sales a year would be exempt.
For an excellent resource for information on state tax rates and rules, check The Sales Tax Clearinghouse, www.thestc.com. Click on the link to "State tax rates and DoR webpages" to find a link to your state's sales tax authority. You can also click on "Lookup Rates" to find the sales tax -- state, county, local, etc. -- for any address.
One thing's for certain -- if you're going to be making sales in any state with a sales tax, talk to an accountant! It's not easy to figure out all the details on your own.
Copyright Rhonda Abrams, 2003
Rhonda Abrams is the author of The Successful Business Plan: Secrets & Strategies and the president of The Planning Shop, publisher of books and tools for business planning. Register for her free business planning newsletter at www.PlanningShop.com.