Paying Sales Tax in the USA – What you need to know
This tax discussion is relevant to US merchants only
Setting up a new business can be a daunting venture. There are so many rules and regulations and so much paperwork to do it can be hard to know where to start. One of the first things that you will need to do is to register your business to pay sales tax.
What is sales tax?
Sales tax is a percentage amount per sale that you must pay to the state in which your business operates. The amount varies from state to state and you collect the money into your business accounts throughout the course of the year, with most businesses then paying the state on an annual basis.
Where does the money I pay to the state go?
The money collected in sales tax returns is normally used within the state for community-related projects such as schooling, parks and roads. Many states find that sales tax makes us a substantial part of their annual budget and so paying yours will help put back into the community where your business is based.
How do I know if I have to pay sales tax?
Almost all businesses have to pay sales tax. The first step you should take is to establish where you have nexus. Nexus is something that is created if your company has a significant presence within a state, either on a temporary or a permanent basis. A significant present can be classed as:
- Employees – whether direct or independent.
- A physical office, warehouse or other buildings.
- Affiliates within the state.
- Drop shipping to customers.
- Temporary through-state sales whilst travelling
- Attendance at trade shows or similar
The exact rules and regulations on nexus can differ between states so it is vital to check with your state tax authority whether or not you have sales tax nexus. If your business spans multiple states, you will need to contact their individual authorities to confirm your nexus status.
I’ve confirmed that I have nexus, now what do I do?
The majority of states will need you to register for a permit before you are able to begin collecting sales tax. Failure to do so is seen as unlawful and may land you with a penalty fine before you have even started earning any money!
In order to obtain a permit, contact your state’s Department of Revenue. They may direct you to an online form to complete, or provide you with a paper copy. Not all states will charge for a permit, but the Department of Revenue office will be able to advise you of any costs that may be involved. They will also inform you of the payment frequency options, as many states, as well as accepting annual payments, will allow you to pay on a monthly or quarterly basis which may suit your business needs better.
Remember that if your business is multi-state then you will need to approach each state’s Department of Revenue for individual permits.
How do I collect the sales tax?
Most businesses collect sales tax within the cost of their sales by factoring in the percentages when they calculate prices. For example, if you are selling a sweater that cost you $12 to purchase, and you know you will have to pay an 8% sales tax, then you know you will need to sell that sweater for at least $12.96. This will ensure that you break even, but you will not make a profit either. If you then want to make a 30% profit margin you will need to sell the sweater for 30% more than $12.96, meaning a sales ticket price of $16.84. Organising your costs this way means that the sales tax is incorporated into the overall ticket price.
As the amount of sales tax can vary from state to state it is important to check that your systems are all set up to include the varying amounts, regardless of how many revenue streams or locations you may be selling across.
How do I know how much sales tax I have collected?
Collecting the money in your bank account is one thing, but in order to submit your sales tax return you need to keep a track of how much sales tax you are accumulating. One of the best ways to do this is by using Point of Sale (POS) software and equipment. POS software is designed with customizable parameters and comprehensive reporting, meaning that you can see exactly how much sales tax you have accumulated with just a few buttons. It even works if you sell across multiple platforms as it can compile data succinctly. You can also tailor reporting parameters to include things such as where you customer lives, which is especially useful if your state requires breakdowns by city, county or specific tax district which are time-consuming to do by hand. POS systems are by far the most cost-effective method of obtaining specific reporting data.
If you are opting for more traditional reporting, then spreadsheets can become your best friend or your worst enemy, as you will need manually input sales data in order to obtain an accurate report. Alternatively you could use software such as TaxJar to help you, although it is nowhere near as comprehensive or straightforward as a POS system.
When do I need to submit my tax return?
The majority of businesses only need to file a tax return on an annual basis, and many states usually request that this happens in January, just after the busy holiday period. If you know you have a tax return pending, it is highly advisable to get started on it as soon as possible.
Check with your state on their preferred method of payment, many now accept an online transaction but if your state doesn’t then you will need to allow time to make the necessary arrangements.
It is also advisable to make sure you pay early or on time wherever possible. Paying ahead of the deadline will prevent your business from incurring a late penalty fine, and also at the time of writing, 24 states offer a small discount for paying on time or ahead of schedule. For example, in New York you could save up to 5% sales tax (to a maximum of $200) per quarter, meaning that paying on time could save you $800 per year!
What if I haven’t collected any sales tax this year?
If your business has not been actively selling in the last year, you will still be required to submit a zero-return sales tax return. This will tell the state that you are still operating as a business even though no sales have been made. Failure to submit a zero tax return could also result in you incurring a penalty fine.
What happens next?
You can breathe a big sigh of relief as your sales tax return is over until the next time! Whether you opt for comprehensive Point of Sale technology that does all the hard work for you or you stick with doing your own calculations, there is a method of completing sales tax returns that works for you!