Answering Common Sales Tax Questions for Businesses

Sales tax is a consumption tax that state and local governments impose on the sale of certain goods and services. Businesses are responsible for calculating, collecting, and remitting this tax to the proper government authorities. The revenue funds public services like schools, transportation networks, and public safety departments.

Determining Your Sales Tax Obligation

A business must collect and remit sales tax in any state where it has nexus, which is a connection between a business and a state that creates a tax obligation. If a business has nexus, it must register with that state’s tax authority, collect sales tax from customers there, and file regular returns. An obligation in one state does not automatically create one in another.

The traditional standard for nexus is a physical presence in a state, and the criteria are often broadly defined. Activities that create a physical presence include owning or leasing property like a retail store, office, or warehouse. Having employees or independent contractors working on the company’s behalf also establishes nexus. Storing inventory in a state, even in a third-party fulfillment center used by e-commerce businesses, is another common trigger. Additionally, sending sales representatives into a state or temporarily conducting business at a trade show can create a tax collection duty.

Economic nexus, a more recent development, does not require a physical footprint in a state. This principle was established by the 2018 Supreme Court decision in South Dakota v. Wayfair, allowing states to require tax collection from out-of-state sellers based on their economic activity. Following this decision, nearly all states with a sales tax adopted economic nexus laws.

These laws set specific thresholds of economic activity, such as $100,000 in gross sales, that a business must exceed within the previous or current calendar year. Once a remote seller surpasses a state’s threshold, it has economic nexus and must register to collect sales tax. Businesses must monitor their sales in every state, as crossing these thresholds creates a tax obligation, and failure to comply can result in significant liabilities for uncollected taxes, penalties, and interest.

Identifying Taxable Goods and Services

After establishing nexus in a state, a business must determine which of its sales are taxable. Most states tax the retail sale of tangible personal property, which includes physical items like furniture, electronics, and clothing. The taxability of services is more complex and varies by state. Services are often not taxable unless specified in the state’s tax code, though many states are expanding their tax base to include services like repairs, landscaping, and telecommunications.

The tax treatment of digital products and Software-as-a-Service (SaaS) is a challenging area due to inconsistent rules across states. Digital goods like e-books, downloadable music, and streaming services may be classified as taxable tangible property or as exempt intangible goods. The method of delivery, such as a one-time download versus a subscription, can also affect taxability. Similarly, states treat SaaS differently, categorizing it as a taxable service, tangible property, or a non-taxable item based on their own definitions and the terms of the user agreement.

The taxability of shipping and handling charges also depends on state rules. In many states, if the item sold is taxable, the associated shipping charges are also taxable, especially if not stated separately on the invoice. Some states exempt shipping charges if they are listed as a separate line item. If a shipment contains both taxable and non-taxable items, the shipping charge may need to be allocated between them.

Managing Sales Tax Exemptions

Some transactions are exempt from sales tax even if the product or service is normally taxable. Exemptions are based on the buyer’s identity, the product’s intended use, or the nature of the product itself. Sellers are responsible for collecting and maintaining proper documentation for all exempt sales to avoid liability for uncollected tax during an audit.

A common exemption is for sales for resale, which occurs when a business purchases goods it intends to resell to its own customers. Another category of exemption is based on the type of entity making the purchase, such as federal, state, and local government agencies, public schools, and qualifying non-profit organizations.

For any exempt sale, the buyer must provide the seller with a valid exemption or resale certificate at the time of purchase. The seller is responsible for ensuring the certificate is valid and properly completed, which includes confirming the buyer’s tax registration number, and keeping the document on file for state auditors. Without a valid certificate, the sale is considered taxable.

States also provide product-based exemptions for necessities, which apply to all sales of those items. Common examples include groceries, prescription drugs, and some clothing. Each state precisely defines which items qualify for these exemptions.

Registering for a Sales Tax Permit

Before collecting sales tax, a business must register for a sales tax permit with the Department of Revenue or equivalent agency in each state where it has nexus. Most states require businesses to apply through an online portal, which involves submitting an application with key information about the business.

• Federal Employer Identification Number (EIN), a nine-digit number assigned by the IRS to identify a business entity. Sole proprietors without employees may sometimes use their Social Security Number.
• Legal business name and any “Doing Business As” (DBA) or trade names.
• Business structure, such as a sole proprietorship, partnership, LLC, or corporation.
• Physical address of the business and the names and addresses of owners, partners, or corporate officers.
• North American Industry Classification System (NAICS) code, used to classify business establishments.
• The date business activities began in that specific state, which establishes the start date of the tax obligation.

After the application is submitted and approved, the state will issue a sales tax permit. This permit grants the business the authority to collect sales tax.

Filing and Remitting Collected Sales Tax

Once registered, a business must periodically file a sales tax return and remit the collected funds to the state. The state determines the filing frequency based on the business’s sales volume. States assign a filing frequency—most commonly monthly, quarterly, or annually—with higher-volume sellers required to file more often.

The sales tax return is the form used to report the total amount of sales and the tax collected for a specific period. A return requires the business to report its total gross sales, subtract any non-taxable or exempt sales to arrive at the net taxable sales figure, and then calculate the tax due. Some states offer a small discount for filing on time as an incentive for compliance, which can reduce the final amount owed.

Most states now require businesses to file returns and make payments electronically through an online portal on the tax agency’s website. The process involves entering the calculated numbers—gross sales, exempt sales, and taxable sales—into the digital form. After submitting the return, the business must remit the tax due.

Common payment options include an ACH debit from a business bank account or a credit card, though this option often comes with a processing fee. Completing both the filing and payment by the state’s deadline is necessary to avoid penalties and interest.