When Do I Need to Collect Sales Tax? A Business Breakdown

Sales tax is a consumption tax that businesses collect from customers on behalf of state and local governments. This tax is typically added to the purchase price of goods and certain services at the point of sale. The funds generated from sales tax contribute to public services and infrastructure within the taxing jurisdictions.

Businesses are generally required to collect sales tax if they have a sufficient connection to a state and sell taxable goods or services there. The specific rules for sales tax vary considerably by state, and sometimes even by city or county. This variation makes sales tax compliance a complex area for businesses operating across different jurisdictions.

Understanding Sales Tax Nexus

Sales tax nexus is the fundamental concept determining when a business has a sufficient connection to a state to be legally obligated to collect sales tax. Without nexus in a state, a business generally has no obligation to collect or remit sales tax for sales made into that state.

Physical nexus arises from a traditional physical presence within a state. This includes having an office, a warehouse, or employees located in the state. Even a temporary presence, such as attending a trade show, can establish physical nexus. For example, a business that sends a sales representative to a convention in a state where it otherwise has no presence might create physical nexus for the duration of that event.

Economic nexus is a more recent development, stemming from the 2018 South Dakota v. Wayfair Supreme Court decision. This concept dictates that a business can establish nexus based on a certain volume of sales or transactions into a state, even without a physical presence. Most states with a sales tax have adopted economic nexus laws. The specific thresholds vary widely by state, but commonly include a certain dollar amount of sales, such as $100,000, or a specific number of transactions, which could be 200 or more. Businesses must actively monitor their sales into each state to determine if they meet these economic nexus thresholds.

Affiliate nexus can be established when a business has an in-state affiliate who promotes or sells its products. For instance, if an out-of-state retailer partners with an in-state company that advertises its products, the out-of-state retailer might gain nexus through that affiliate relationship.

Click-through nexus can be triggered by agreements with in-state residents who refer customers to the seller via web links, often for a commission. If a business pays a commission to an in-state blogger for directing customers to its website, that arrangement could create click-through nexus in that state.

Marketplace facilitator laws impact sellers using platforms like Amazon or Etsy. Under these laws, the marketplace facilitator, rather than the individual seller, may be responsible for collecting and remitting sales tax for sales made through their platform. This shifts the compliance burden from numerous small sellers to the larger marketplace entities. Businesses selling through such platforms should understand their facilitator’s responsibilities for proper sales tax handling.

Determining Taxable Products and Services

Once a business establishes sales tax nexus in a state, the next step involves identifying which products and services are subject to sales tax within that jurisdiction. Taxability rules vary considerably by state, and even locally. A product or service taxable in one state might be exempt in another.

Most tangible personal property is commonly subject to sales tax, including physical goods like clothing, electronics, furniture, and books. Generally, if an item can be touched and moved, it is taxable unless a specific exemption applies.

Services, on the other hand, are generally exempt from sales tax in many states. However, there is a growing trend for states to expand sales tax to include certain services. Examples of services that are increasingly becoming taxable include digital services like streaming subscriptions, software as a service (SaaS), or online gaming. Other services, such as installation, repair, or maintenance services, may also be subject to sales tax depending on the state’s specific regulations.

Common exemptions exist for certain types of goods and services. Food for home consumption, often referred to as groceries, is frequently exempt from sales tax, though prepared food for immediate consumption at a restaurant usually is not. Prescription medicines are also widely exempt. Sales for resale, where a business buys an item to resell it, are typically exempt, provided the buyer provides a valid resale certificate to the seller. Some states also offer exemptions for specific manufacturing equipment or agricultural supplies to support those industries.

Businesses must stay updated on the specific taxability rules for each state where they have nexus. Consulting state tax authority guidance or utilizing tax compliance software can help businesses accurately determine the taxability of their offerings.

Registering for a Sales Tax Permit

After a business determines it has sales tax nexus in a state and sells taxable items, it must register for a sales tax permit. Registration is required with the state’s tax authority in every state where it is obligated to collect and remit sales tax. This authority might be called the Department of Revenue, the Comptroller’s Office, or a similar state agency.

The general process for obtaining a sales tax permit typically involves applying online through the state’s dedicated tax portal.

When applying, businesses will need to provide specific information, including:

• The business’s legal name
• Its physical address
• Its Employer Identification Number (EIN) issued by the IRS
• Details about the business type, such as sole proprietorship, partnership, or corporation
• The anticipated start date of sales activities in that state and contact information for a responsible party

Once the registration application is processed and approved, the business will receive a sales tax permit or license number. This unique identifier authorizes the business to collect sales tax in that state and may also specify the sales tax filing frequency.

Ongoing Sales Tax Compliance

After obtaining a sales tax permit, a business assumes ongoing responsibilities: accurately collecting sales tax from customers and regularly filing returns to remit collected funds. Businesses must ensure their systems are set up to capture the correct tax rates at the point of sale.

Collecting sales tax accurately involves applying the correct sales tax rate, which can vary by state, county, city, and even specific districts. For example, a sale in one city might have a combined state and local rate of 7.5%, while a sale just a few miles away could be 8.25% due to different local jurisdictions. Many businesses utilize sales tax software or integrated point-of-sale systems to automatically calculate and apply the correct rates based on the customer’s location.

Filing sales tax returns and remitting payments is a recurring obligation. Businesses are assigned a filing frequency by the state, which can be monthly, quarterly, or annually, depending on their sales volume and state requirements. High-volume sellers are typically required to file more frequently, such as monthly, while smaller businesses might file quarterly or annually. These returns summarize the total sales, taxable sales, and sales tax collected during the filing period.

Accurate record-keeping is important for ongoing sales tax compliance. Businesses should maintain detailed records of all sales transactions, sales tax collected, and any sales with exemptions. These records are essential for preparing accurate returns and may be required during a state tax audit. Failure to comply with sales tax regulations, such as late filing or underpayment, can result in penalties, including late filing fees and interest charges.