Entrepreneurs are accountable for a variety of small company taxes, including sales tax. There is a sales tax in 45 states and Washington, DC This money is used by states to fund budget issues such as schools, roads, and public safety.
Customers must be charged sales tax if a business sells a taxable product or provides a taxable service. Calculating the right sales tax rates, collecting payments, completing sales tax reports, and paying the tax can all take a long time, especially for new business owners. This is especially true if you sell a variety of items or operate in several states.
We’ll go over the procedures involved in collecting, reporting, and paying sales tax to assist you to figure things out. We’ll begin by determining if your goods or service is liable to sales tax. You should feel a lot more secure in reporting after reading this.
Sales Tax Collection, Reporting, and Payment
Step 1: Determine if your product or service is subject to sales tax.
In terms of which items and services are subject to sales taxes, state regulations differ greatly. You don’t have to pay statewide taxes if you solely sell in Alaska, Delaware, Montana, New Hampshire, or Oregon, while Alaska and Montana enable cities to impose a sales tax.
Sales taxes are usually levied on retail products such as handbags and clothing. Sales taxes are normally excluded from prescription pharmaceuticals and food goods, while the restrictions vary by state. When you offer digital or online commodities, things get a little more tricky.
You must pay sales tax in any state where your firm has a “tax nexus” if you sell taxable goods or services. You can create a nexus by running a physical store in a state, employing one or more people in a state, or surpassing a certain sales volume in a state, for example.
Online Sellers’ Sales Taxes
Following the Supreme Court’s judgment in South Dakota vs. Wayfair in 2018, many online businesses are required to collect sales tax. The Supreme Court ruled in this decision that states can compel internet retailers to charge and collect sales tax, even if they don’t have a shop or other physical presence in the state.
24 states now compel online businesses to collect and pay sales tax as a result of Wayfair.
[1] Most of these jurisdictions, fortunately, exempt online retailers that execute fewer than 200 internet transactions or make less than $ 100,000 in sales each year.
Step 2: Apply for a sales tax license.
You must apply for a sales tax permit in each state where you have a taxable nexus before you may collect sales tax. If you do business in more than one state, you must register in each of them. This may usually be done for free on the website of each state’s department of revenue. To register, you’ll need essential company information like your employer identification number and address. You’ll get a sales tax ID at the end, which you should use to report your sales tax.
Step 3: Determine the rate of sales tax.
To begin, the sales tax rate that your business must charge is determined by where you sell. If you sell in more than one state, you’ll have to compute and collect taxes in each one.
The majority of states have a sales tax that is dependant on where you go. This implies that the sale occurs wherever the customer utilizes the goods. Let’s imagine you operate a business in New York and you’re shipping an item to a consumer in New Jersey. You must calculate and charge the New Jersey sales tax to the client (in addition to any local sales tax). You’d also have to submit a sales tax return in New Jersey.
Only a few states have origin-based sales taxes, which implies the sale is deemed to occur in the state of origin.
Step 4: Collect sales tax at the moment of sale or throughout the checkout process.
Try using point-of-sale software like Square to make sales tax calculations easier. All you have to do now, thanks to Square’s TaxJar connection, is enter the areas where you sell, and the app will compute the relevant state and local sales tax rates.
Whether you use a POS or do your own calculations, you’ll need to show the sales tax amount separately from the item’s purchase price. Square is set up to split sales tax from the rest of the receipt on a separate line.
Step 5: Send the state your sales tax return and payment.
The final step is to file your sales tax return with the state, as well as the actual money you’ve received from consumers. Sales tax payments can be automatically sent to a different account if you use accounting software like QuickBooks.
The deadlines for reporting sales tax vary greatly depending on the state you do business in. The deadline is normally on the 20th or 25th day following the conclusion of the reporting period. Some states require you to report and pay sales tax every month, while others require you to do so every quarter or year. Higher volume vendors’ reporting and payment schedules are frequently more frequent. Most states, fortunately, allow you to submit and pay your taxes online.