Do I Have to Charge Sales Tax for My Business?

Sales tax is a consumption tax that businesses collect from customers at the point of sale and then remit to state and local governments. Determining whether a business must charge sales tax is a complex process, as the obligation depends on various factors that differ across jurisdictions. This article guides businesses through the primary considerations that establish a sales tax collection requirement.

Understanding Sales Tax Nexus

Businesses must collect sales tax only in jurisdictions where they have a sufficient connection, known as sales tax nexus. This connection establishes a legal obligation for the business to comply with that jurisdiction’s sales tax laws. Nexus can be created through physical presence or economic activity within a state.

Physical presence nexus is established when a business has a tangible connection to a state. This includes having a physical location, such as an office, warehouse, or retail store. Employees working in a state, even remotely, can also create physical nexus. Storing inventory in a third-party warehouse or attending a trade show can also establish a physical presence requiring sales tax collection.

Economic nexus stems from the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. This ruling allowed states to require out-of-state sellers without a physical presence to collect sales tax if their economic activity within that state exceeded certain thresholds. These thresholds involve a specific amount of gross sales or a certain number of separate transactions within a calendar year. For example, many states set a threshold of $100,000 in gross sales or 200 separate transactions into the state.

Businesses must monitor their sales volume and transaction count in all states to determine if they meet these economic nexus thresholds. Once a threshold is met, the obligation to collect sales tax begins. Other forms of nexus can also arise, such as affiliate nexus, where an out-of-state seller has an agreement with in-state individuals or businesses who refer customers for a commission. Click-through nexus, a variation of affiliate nexus, can also be established if an out-of-state seller generates sales via links on websites of in-state residents.

Identifying Taxable Sales

Once a business has determined it has nexus in a particular state, the next step involves identifying which goods and services are subject to sales tax. The sale of tangible personal property is taxable. This includes physical goods like clothing, electronics, and furniture.

The taxability of services is varied. An increasing number of jurisdictions now tax specific services. Examples include digital services, landscaping, cleaning services, consulting, and certain repair services. Businesses must research the specific regulations for their services in each state where they have nexus, as taxability can differ significantly.

Many common exemptions exist, which can reduce a business’s sales tax burden. Certain food items, particularly unprepared groceries, are exempt from sales tax, while prepared foods sold in restaurants are taxable. Prescription medications are exempt from sales tax. Sales for resale are also exempt, provided the purchasing business furnishes a valid resale certificate to the seller.

The specific taxability rules for products and services, along with applicable exemptions, vary from one state to another. Businesses must conduct research using state tax authority websites or consult with tax professionals to accurately determine the taxability of their offerings in each jurisdiction where they have an obligation to collect.

Sales Tax Registration and Collection

After determining that a business has sales tax nexus and understands which of its sales are taxable, the next step is to register with the appropriate state tax authority. This process involves applying for a sales tax permit or license from the state’s Department of Revenue or equivalent agency. Registration is required before a business can begin collecting sales tax from customers.

The registration application requires specific information about the business. This includes the legal business name, physical address, Employer Identification Number (EIN) if applicable, business type, and the effective date when the business began or expects to begin making taxable sales in that state. Most states provide online portals for this registration, which takes a few business days to process.

Applying the correct sales tax rate to transactions requires understanding state and local rules. Sales tax rates can vary by state, county, city, and even specific districts within a city. Businesses must also consider whether a state uses an origin-based or destination-based sourcing rule. Origin-based sourcing applies the sales tax rate of the seller’s location, while destination-based sourcing applies the rate of the buyer’s location.

Collecting sales tax involves adding the calculated tax amount to the customer’s purchase price at the point of sale or on the invoice. Many businesses use point-of-sale systems, e-commerce platforms, or specialized sales tax software that can automatically calculate and apply the correct rates based on the customer’s location. This helps ensure accuracy in collection and simplifies the process.

Once collected, businesses are responsible for filing sales tax returns and remitting the collected tax to the state on a regular basis. Filing frequencies vary, such as monthly, quarterly, or annually, and are determined by the volume of sales tax collected. These filings are completed through the state’s online tax portal, requiring details such as total sales, total taxable sales, and the total amount of sales tax collected during the filing period.