Sales tax is a fundamental part of doing business in the United States, but it’s also one of the most misunderstood. Between changing state laws, online transactions, and local variations, even experienced business owners can have a hard time understanding sales tax and remaining compliant. You never have to figure it out on your own. Working closely with a CPA or bookkeeping service could go a long way to save you from ending up in sales tax trouble.
In this guide, we break it down to help you better understand when, where, and how to collect sales tax to avoid costly penalties and ensure you are doing it right.
What Is Sales Tax?
Sales tax is a state-imposed tax on the sale of goods and certain services. When a customer buys a taxable item, the seller collects the tax at the point of sale and then remits it to the appropriate tax authority. That authority is usually the state’s department of revenue.
Sales tax:
- Is percentage-based (e.g., 6.5%, 7.25%)
- May include state, county, and local rates
- Applies to consumers, not businesses, though businesses are responsible for collecting and remitting it
It’s important to understand that sales tax is not optional. If you’re required to collect it and fail to do so correctly, your business may be held liable for the unpaid tax.
When Are You Required to Collect Sales Tax?
This is probably one of the hardest steps to understand. How do you know when to collect sales tax or not? Sales tax laws vary by state, but in most cases, you must register for a sales tax permit and collect tax on taxable sales in your state. Then, you must remit the applicable tax to the state.
These are some things that establish a nexus between your business and the state:
- Having a physical location (store, office, warehouse)
- Having employees or contractors working in the state
- Owning property or inventory in the state
- Attending trade shows or events regularly
- Reaching certain sales or transaction thresholds
Where Should You Collect Sales Tax?
Once you’ve determined you need to collect tax, the next step is figuring out where to collect it and how much to collect.
Origin-Based vs. Destination-Based States
States use one of two systems for determining which sales tax rate to charge:
- Origin-Based: You charge the tax rate based on where your business is located. (Used in states like Texas and Pennsylvania.)
- Destination-Based: You charge tax based on where your customer is located. This is the most common method, especially for online and shipped purchases.
Destination-based states can be trickier because you need to calculate the combined rate for the customer’s location, often including local city or county taxes.
Marketplace Facilitator Laws
If you sell through platforms like Amazon, Etsy, or eBay, you might not need to collect sales tax at all. Most states now have marketplace facilitator laws that require the platform, not the seller, to handle tax collection and remittance.
However, it’s still your responsibility to:
- Know what your platform is collecting
- Report your marketplace sales accurately
- Register in states where you make non-marketplace sales
How to Collect and Remit Sales Tax
We’ve put together some steps to follow to help with collection and remittance of sales tax.
- Register for a Sales Tax Permit: register with any state that you have a nexus with before you start collecting sales tax. Most states have a process with their department of revenue and will have specific instructions. Typically, you need your business name and address, EIN, a description of products and services sold, and an estimate of monthly or annual sales. Do not collect sales tax without this permit, as it is considered illegal.
- Set Up Proper Tax Collection Tools: you can use a point of sale system or e-commerce platform that will help automatically calculate sales tax and can even do so based on location. These systems can handle multiple rates and integrate with your accounting software to make reporting easier.
- Collect the Right Tax Rate: when a sale is made, it is your responsibility to calculate and apply the right tax rate to include county, municipal, and state. Be sure to differentiate between taxable and non-taxable products and apply any correct exemptions.
- File Returns and Remit Payments: depending on your state and business size requirements, you will file monthly, quarterly, or annually. Most states require a sales tax return that shows total sales, table sales, exemptions, and taxes collected. You can make an electronic payment to remit taxes.
Special Situations to Watch For
- Resale Certificates: if another business buys from you to resell the product, they can provide a resale certificate and you don’t charge sales tax.
- Tax Holidays: some states have annual tax-free periods on school supplies, clothing, or disaster preparedness items.
- Services: not all services are taxable. In some states, digital products, repairs, or professional services are. Always check the specific state’s guidelines.
Tips to Stay Compliant
These tips can be helpful for you to remain compliant with sales tax filing and remittance.
- Monitor economic nexus laws: these change frequently.
- Keep accurate records for at least 3-5 years.
- Don’t rely solely on ZIP codes, as some areas have overlapping jurisdictions.
- Consult a tax professional for multi-state sales or complex operations.
Always consult with a CPA to ensure you are doing this process correctly and avoid penalties or fees. They can help with tracking and monitoring or even make recommendations for a process in some cases.
Work with Katherine M. Johnson, CPA, for Sales Tax Support and More
Collecting sales tax may seem overwhelming at first, but once you understand the when, where, and how, it becomes a manageable part of your business operations. Start by confirming where you have nexus, register for the appropriate permits, and implement systems that help you charge the correct rates and file on time. Whether you sell online, in person, or both, staying ahead of your sales tax obligations protects your business from costly penalties and builds customer trust.
Let Katherine M Johnson, CPA, help you with understanding sales tax or getting the support you need. Contact us today!
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