Do I Need to Collect Sales Tax for My Business?

Sales tax is a consumption tax levied by state and local governments on the sale of goods and services. It is a percentage of the purchase price, collected by the seller from the consumer. This revenue funds public services like education, healthcare, and infrastructure. Businesses collect the tax at the point of sale and remit it to the appropriate tax authorities.

Understanding Sales Tax Nexus

Determining whether a business needs to collect sales tax begins with understanding “nexus.” Nexus refers to the sufficient connection a business has with a state that creates a sales tax obligation. This connection can be established through various activities, triggering the requirement to register and collect sales tax. Rules for establishing nexus vary by state.

Physical Presence Nexus

Physical presence nexus is the traditional standard for sales tax collection, arising when a business has a tangible footprint in a state. This can include owning or leasing property like offices, retail stores, or warehouses. The presence of employees, whether full-time or part-time, also typically creates physical nexus. Storing inventory in a state, even through a third party, can establish this connection. Additionally, a temporary presence, such as attending trade shows or making sales at events, may create physical nexus.

Economic Nexus

Economic nexus is relevant for online sellers and was established by the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. This ruling overturned the prior physical presence requirement, allowing states to mandate sales tax collection based on a business’s economic activity within their borders. States typically set thresholds for economic nexus based on sales volume or transaction count, such as $100,000 in sales or 200 separate transactions into the state annually.

Affiliate Nexus

Affiliate nexus can arise when a business has a relationship with another business or individual in a state that has a physical presence. This relationship might involve a common owner, branding, or an in-state affiliate promoting sales for the out-of-state business. The in-state affiliate’s activities, such as advertising or providing services on behalf of the remote seller, can create the connection for sales tax obligations. Some states have specific thresholds for affiliate nexus.

Click-Through Nexus

Click-through nexus is a specific type of affiliate nexus that gained prominence with the rise of e-commerce. It occurs when an out-of-state business pays a commission or referral fee to an in-state third party for sales generated via links on their website. Many states with click-through nexus laws have de minimis thresholds, meaning referrals must generate a certain amount of sales within a specified period.

Marketplace Facilitator Laws

Marketplace facilitator laws shift the sales tax collection responsibility from individual sellers to the online marketplace platform itself. These laws require platforms like large e-commerce sites to collect and remit sales tax on behalf of their third-party sellers for transactions conducted through their platform. This simplifies compliance for many sellers, as the marketplace handles the tax for those specific sales. However, sellers remain responsible for collecting and remitting sales tax on sales made outside of the marketplace, such as through their own website or physical locations.

Identifying Taxable Products and Services

Once nexus is established, understanding which products and services are subject to sales tax is the next step. States have broad discretion in defining what is taxable. Businesses must research the specific taxability rules for each state where they have nexus.

Tangible Personal Property

Most states generally impose sales tax on the sale of tangible personal property. This category includes physical goods like clothing, electronics, and other merchandise. Numerous exemptions exist, such as for groceries, prescription medications, and certain clothing items.

Services and Digital Products

The taxation of services has evolved, with more states beginning to tax specific services that were traditionally exempt. While many services remain untaxed, common examples of taxed services include repair services, landscaping, and certain digital services. Many states now impose sales tax on digital products like e-books, streaming services, and software downloads.

Sales Tax Holidays

Sales tax holidays represent temporary periods during which specific items are exempt from sales tax. These holidays encourage consumer spending and typically focus on categories like back-to-school supplies, energy-efficient appliances, or emergency preparedness items.

Registering for Sales Tax and Ongoing Compliance

After determining a sales tax obligation through nexus, the next step involves registering with the appropriate state tax authority before collecting any sales tax. The process typically involves obtaining a sales tax permit, also known as a seller’s permit or resale certificate, from the state’s Department of Revenue or an equivalent agency.

Registration Process

The registration process is commonly completed online through the state’s tax website. Businesses generally need to provide information such as their legal business name, physical address, Employer Identification Number (EIN), description of business activities, and estimated sales volume. A sales tax license or permit is typically required for each state where nexus is established and sales tax will be collected.

Recordkeeping

Maintaining accurate and comprehensive records is a continuous compliance requirement. Businesses must keep detailed records of all sales, both taxable and exempt, and the sales tax collected. These records should include sales receipts, invoices, and any exemption certificates. Most states require businesses to retain sales tax records for a period ranging from three to seven years.

Sales Tax Audits

Accurate recordkeeping is also crucial in the event of a sales tax audit. State tax agencies conduct audits to ensure businesses are complying with sales tax laws by correctly collecting and remitting taxes. Common triggers for an audit include failing to register when nexus is established, inconsistencies in reported sales, or being associated with another business that was audited.

Collecting and Remitting Sales Tax

Once registered, businesses must accurately calculate, collect, and then remit the sales tax to the state. The sales tax rate applied to a transaction can vary significantly, often depending on the specific state, county, city, and even special taxing districts. Businesses must determine the correct rate based on the customer’s location or the seller’s location, depending on whether the state follows origin-based or destination-based sales tax rules.

Collection Methods

Sales tax is typically collected from customers at the point of sale, whether through a physical cash register, an e-commerce platform, or an invoicing system. Point-of-sale (POS) systems, e-commerce platforms, and accounting software often automate the calculation and collection of sales tax. These systems help apply the correct rate and ensure the tax is clearly itemized for the customer.

Filing Frequency and Due Dates

States assign businesses a specific filing frequency for sales tax returns, which can be monthly, quarterly, semi-annually, or annually. This frequency is generally determined by the business’s sales volume or the amount of sales tax collected; businesses with higher sales typically have more frequent filing obligations.

Remittance

Filing sales tax returns and remitting the collected tax to the state is usually done electronically through the state’s tax portal. Due dates for filing and payment vary by state but are commonly set around the 20th of the month following the taxable period. Failing to collect, file, or remit sales tax correctly can result in penalties, including fines and interest charges.