When Do I Need to Collect Sales Tax?
If you sell physical goods in a particular state, you are probably required to collect sales tax from your customers. However, there are exceptions. Each state has its own unique list of taxable goods, which in most cases can be found on your State Department’s website under the Department of Revenue (sometimes called the “Department of Taxation”).
Here are some common (but not universal) exceptions to state sales taxes:
- Food, particularly from grocery stores to be prepared in the home
- Prescription drugs
- Agricultural products, like seeds and animal food
- Products for resale, raw materials or inventory that will be resold
- Intangible property (such as computer software)
Remember, these exceptions provide a general guideline, but it’s critical that you research your state’s individual tax laws, since many of them can be quite complex. For example, in Texas “baked goods” such as doughnuts, bagels and bread are exempt from sales tax, but the law explicitly excludes items like pretzels, sandwiches or pizza from the “baked goods” classification.
What About Services?
Services are less likely to be taxed than goods, but most states tax some services. Services that are performed in connection with the sale of physical property (like the delivery of a couch you just purchased), or those that directly lead to the production of physical goods (such as printing) are much more likely to be taxed. Service providers that are commonly exempted from sales tax include:
Most charitable and religious organizations are also exempt from sales taxes.
How Much Do I Need to Collect?
The state tax rates fluctuate on monthly basis. Here is a current list of the sales tax rates as of May 2018. If you are selling goods in one of the 45 states with sales tax, you are responsible for collecting and filing these taxes with your state government.
Keep in mind that you may also be responsible for local sales tax based on the city, county or jurisdiction that you or your customer resides in. Here’s how it works:
- If your business operates in an origin-based state, then your sales tax is based on where your business is located.
- If you operate in a destination-based state, then your tax rate is based on where your buyer is located (if you ship the item directly to their home).
For a visual map that breaks down origin- and destination-based states, click here. To determine the exact tax rate for a specific address in your state, check out this awesome tool where you can look up sales tax by address.
When researching your state tax rates you may also come across a mention of the use tax, which is a type of excise tax that is often used for out-of-state purchases. The use tax is generally not the seller’s responsibility; in most cases is supposed be declared and filed by the purchaser in his or her home state.
As a business, you are not usually required to collect sales tax from individuals who purchase items from another state, unless you have a physical presence in that state. Read on to understand these rules further.
Out-of-State Sales Tax
Considering there are 50 different states (each with their own complex tax laws), it’s no surprise that business owners find the prospect of out-of-state sales taxes to be daunting.
When are you responsible for collecting taxes from customers in another state?
To protect small businesses from the complexity of multi-state taxation, the federal government provides limitations on how states can tax the sale of goods across state lines. The Supreme Court has established that states cannot require out-of-state sellers to collect taxes from their customers unless they have a nexus within that state.
Literally translated as a “connection,” a nexus means that your business meets one or more of the following criteria:
- Your business has a physical location in that state
- Some of your employees reside and work in that state
- Your business has property (this includes intangible property, like trademarks, copyrights and patents) in that state
- Your employees regularly seek or perform business in that state (for example, if you have an active salesperson in that state)
This means that most online sellers can ship goods out of state without having to charge or collect sales tax. Keep in mind, however, that if you have some sort of physical presence in a state, you may be responsible for collecting sales tax from customers from there.
Paperwork and Filing
In order to legally collect sales taxes, you must get a seller’s permit or license from your state. In some states, like California, you will obtain a seller’s permit on a state level, in others you will also be required to obtain a license from your city, county or jurisdiction (for example, Tempe, Ariz., has its own sales tax license application).
To apply for a sales tax permit visit your State Department’s website, and look for the “sales tax” or “sellers” permit (or license) application under the Department of Revenue.
If you need help applying for a sales tax permit, you may consider using a licensing service like License123 to manage the application process for you. If the prospect of managing your sales taxes is giving you anxiety, consider leveraging accounting software like QuickBooks to help you track and manage you sales tax information, reporting and filing. QuickBooks automatically does all the sales tax calculations so you never have to worry about getting them wrong.