Oh, sales tax. Consumers complain about it all the time, but it’s also a hurdle for business owners. In fact, if you’re selling just about anything (which you probably are), you need to be giving the state tax agency their due.
While you may be groaning and dragging your feet at this point, think of it this way: You’ve got the makings of a business and you’re hoping to turn a profit soon. That’s exciting!
Knowing how to collect sales tax, what a sales tax license is, and when to amend or destroy your license is key to launching a new business. So let’s get started.
What is a sales tax license?
A sales tax license, also known as a sales tax permit or registration in some states, is an agreement with the state tax agency to collect and remit sales tax on items sold by your business.
With a sales tax license, you’re required to collect state and local sales tax in the state that issues the license, and then remit that money to the proper state or local taxing authority. In states that collect sales tax, this license is a must if you form a sales tax nexus, or bond, with that state.
Having nexus in a state and not having a sales tax license can result in hefty fines, legal battles and the complete closure of your business. Essentially, it’s important to register and collect when you meet the qualifications.
What about multi-state businesses or online sellers?
Like many business licenses, a sales tax license is state-specific. This means you need one for each state where you plan on doing business. This is great for single location businesses, but for business entities wishing to branch out, it means acquiring numerous sales tax licenses and staying abreast of sales tax laws for all of those states. This doesn’t even address locals, which may also have a separate registration requirement.
For online sellers in the e-commerce space, things are a little murky. If you have a physical sales presence in a certain state, you will have to collect and pay sales taxes for that state. Any kind of physical location that you actually sell from — such as a small retail space or a vendor stand at a market — or any area where you keep inventory constitutes a physical presence.
For businesses that are entirely online, you may not have to collect sales tax, but you will likely still be subject to a use tax in one of two situations. The use tax generally compliments a sales tax, meaning it is at the same rate as the sales tax, and is due to be paid in cases where it was not charged on a sale and the purchaser’s home state imposes a sales tax.
In the first situation, a use tax will be due on your business purchases where you were not charged sales tax and were not entitled to an exemption. This means your online business would need to file a use tax return for purchases made by it.
The second case is where you could have to charge your purchaser a use tax because they request you to do so.
For example, let’s say you operate in Delaware where there is no sales tax. Someone from California, where there is sales tax, purchases from your store and would like to pay the tax on their items so they do not have to deal with use tax. Here, you don’t collect a Delaware sales tax, but you do charge a use tax to the customer in California. This would be collected by you, as the seller, and then remitted to California.
Because of these two cases, businesses planning on operating across state lines should also pursue a use tax license in any state where they have a physical presence. Again, this means having a retail location or product storage. This will permit you to collect and remit use tax if you wind up in a scenario like the two just mentioned.
Tax laws do frequently change, so be sure to read up on tax information for your primary state of business and any others you have dealings in.
It’s a good rule of thumb to speak with a financial or tax advisor, and confirm whether you have an obligation to collect sales tax and where. As time goes on, your business activities may change, or even cease, making those visits with a financial advisor an even better idea.
Only collect sales tax where your business is registered
This point bears repeating and further explanation.
When a business has a connection with a state, generally the business must register to calculate, collect, and remit sales tax. What qualifies as a connection, or nexus, varies by state.
Absent a formal connection, a state often also allows voluntary registration for sales tax. Whether voluntary or not, however, a business should generally not collect sales tax on behalf of a state or local jurisdiction unless the business has registered to collect tax.
Once registered for sales tax, the state or local government will issue a license or certificate of authority to collect and remit tax. If a small business’s details change, typically the business must take proactive steps to amend, surrender or destroy the business sales tax license or certificate.
When to amend your sales or use tax license
A sales tax license is not a one-and-done deal. Most jurisdictions require that a business amend their sales tax license within a defined time frame, usually 20 days, whenever business details change. Details that require an amendment include any of the following:
- Business name
- Business address, including a new additional business location
- Federal identification number
- Business telephone number
- Owner, officer or responsible person information
- Business activity
Some changes require the state to issue a revised license. For example, if the business changes its name, the state will issue a new license. Alternately, when the business detail that changes does not actually appear on the license (business telephone number, responsible person or business activity, for example), the state will not typically issue a new license, but will just keep the change in their business files.
When in doubt, reach out to a business advisor or contact the state tax agency. At worst, you’re out the time of a phone call. At best, you just saved yourself hefty fines.
When to surrender or destroy your sales or use tax license
Just like how your sales or use tax license needs to be amended in certain situations, there are cases where you need to destroy it all together. You generally must surrender or destroy your license if, among other reasons, you:
- Stop doing business
- Sell, transfer, or assign your business to another party
- Change the form of your business (for example, change from a sole proprietorship to a corporation)
These changes require that you deregister the business. When you deregister, some states will cancel a license when the business simply notes “final” on the last return, while other states provide a formal deregistration process.
In all jurisdictions, you are responsible for filing until deregistration is complete, regardless of the fact that the returns will be for zero dollars. Failure to file even zero dollar returns could result in collection issues, as well as interfere with the release of bond monies paid for the original license. How the deregistration process works varies by jurisdiction.
At the state level, it’s generally best practice to check with the sales tax registration unit for each state. Below are links to the state sales tax web pages and sales tax registration web pages:
This listing excludes the NOMAD States, those States without a State Level Sales Tax: New Hampshire, Oregon, Montana, Alaska & Delaware
Sales tax license vs. sales tax certificate
A sales tax certificate and license may sound similar, but the two are very different. While a sales tax license permits you to collect sales tax, a sales tax certificate actually exempts you from paying it.
A sales tax certificate, also known as a sales tax exemption certificate, is a type of certificate that grants businesses exemptions from paying sales taxes on the purchase of select items in select situations. Coupled with tax deductions, an exemption certificate can help your business save thousands each year by not having to pay sales taxes on items purchased for use in your business.
Exemption certificates are handled on a case-by-case basis, but typically a business can only qualify if the item or items being purchased aren’t used in your day-to-day operations.
For example, if you run a business in retail sales, you can’t apply for an exemption on a new cash register, as it’s something you use in your primary operations.
You can, however, possibly qualify for an exemption certificate if you’re buying wholesale. Let’s say you build clocks. If you purchase clock parts in bulk, you could potentially qualify for a sales tax exemption on those parts. This is again handled on a case-by-case basis, but many businesses manage to get exemption certificates when purchasing bulk materials.
Resale exemptions are also a fairly common form of the exemption certificate. With a resale exemption, businesses that buy certain items to later resell them at a markup are not required to pay sales tax on the original purchase.. Note that sales tax must still be collected on all sales of taxable items to the final consumer.
Nonprofit organizations can qualify for a tax-exempt status, but this isn’t the same as a sales tax exemption certificate. Nonprofits that are tax-exempt typically don’t pay income tax on any money they acquire through activities related to their purpose, like fundraising. They also generally don’t have to pay sales tax on purchases they make for their business activities.
But nonprofits may still have to collect sales tax if they sell anything. For example, they may not pay sales tax on brochures they purchase for a fundraiser, but may have to collect tax from consumers on merchandise they sell at the fundraiser.
Nonprofit tax exemptions, like the other scenarios mentioned, are handled on a case-by-case basis as well. The IRS has guidelines for applying and reviews each case to determine eligibility.
Conquering sales taxes
Small business taxes can be overwhelming, but a little preparation can go a long way toward alleviating that stress. You know your business will almost certainly have to collect taxes at some point, so get ahead of the game and start the process now. Then, you can read up on how to file sales taxes and prepare for the step after that.
With a little research you can determine what tax rates you need to follow, get the appropriate license, and focus on what matters most: running your business like a total boss.