If you sell a product, you’ve probably wondered…what’s the deal with sales tax? Is that my job to calculate?! How much is it? Who do I pay it to? Do I pay for it or do my customers? How do I do that? When do I do that? Is there extra paperwork involved?

Don’t worry, you’re not alone! This is a new concept for many business owners and being the amazing tax gurus that we are (not so humble brag) we’re to help! Here’s what you need to know about sales taxes for your business: 

What is sales tax? 

Sales tax is a tax on retail sales. Ok that’s simple enough, right? These taxes are charged by the state, for sales that happen within that state. Keep in mind, that doesn’t necessarily mean it’s the state you live in or that your business is based out of, since some states don’t charge sales tax. So for example, if you live and work in Montana (which doesn’t charge sales tax) but you sell clothes to customers in North Carolina (which does charge sales tax), sales tax will still be due on those clothing sales. We know, it’s a bummer! 

Generally, services are not taxed, but again, check with the states where you do business just to be sure. A quick Google (or a DM our way) should answer this for you. If you sell both services and products, you will still owe sales taxes on the products. For example, if you’re a hairstylist, you probably won’t be taxed on providing a haircut, but you would be charged sales tax on extensions sold to a client since extensions are a physical product. So keep that in mind! 

When do I have to pay sales tax? 

Check with the states where you do business to see when their sales tax is due. For most states, sales tax is generally due on a quarterly or monthly basis. Quarterly sales tax payments are due on the last day of the quarter. 

Who pays the sales tax? 

Depending on the state, sales tax can be charged to either the seller or the buyer. If the sales tax is charged to the seller (that’s you!), you pay the state directly (this is called a transaction privilege tax – TPT for short). If the sales tax is charged to the buyer, the seller is expected to pass that cost on to their customers by charging them sales tax at checkout and then paying the state at the time of filing their sales and use tax return. Keep in mind that even though you’re the one turning in the payment, it’s not technically an expense to you. The money came from your customer, you are simply collecting and remitting the funds. It’s important to note that you owe sales tax to the state whether or not you remember to charge your customers for it. For that reason, it’s extremely important to double check your POS system is set up properly and charging customers for the correct amount of sales tax.

How do I pay my sales tax? 

Like we mentioned above, you can charge customers sales tax through your point of sales system. (And honestly most POS systems, like Square and Shopify, make it super seamless) After charging the sales tax, you need to file a sales and use tax return to remit the sales tax. To do this you’ll have to take a couple of steps. First, you’ll need to register with the state(s) where you do business. Then, you’ll start filing sales tax returns (don’t worry, they’re much simpler than a full tax return. It’s basically just a record of your sales for the period). Refer to your state government website for more information.

What about Nexus?

Nexus is the obligation to pay tax to a certain tax authority. Essentially, it’s the connection between you (or your business) and a place that wants to tax you. If you have a strong enough connection – like having a physical store or doing lots of business there – you might owe them taxes. But because each taxing authority has different rules for defining the connection, it can be a bit tricky to figure out where you do/don’t have nexus. So how do you know who you owe money to? There are three main things you need to be aware of:

• Destination or Origin Based. Some states charge sales tax based on where the customer lives (destination based sales tax) and other states charge sales tax based on where the business resides (origin based sales tax). 
• Physical nexus. Some states don’t charge sales tax when you physically operate your business in their territory whereas other states will charge sales tax if you simply breathe their air for more than 14 days.
• Economic Nexus. This is extremely important for seller who sell across state lines since economix nexus monitors how many sales you make and how much money you make off of those sales (e.g. 200 transactions or $100K in revenue)

Each state, county, and city wants their piece of the pie and yet, they all have different rules for defining the relationship that establishes nexus and gives them the authority to collect sales tax. Since you only owe sales tax once nexus has been established, it’s your obligation as a business owner to be aware of the nexus rules (destination/origin based, physical nexus, and economic nexus) where you live and where you sell so that you can stay compliant. 

After reading this, you might be thinking “ok that’s WAY too much work.” And you’re right, it is a lot of work. Good thing you are such a capable person! And good thing there are people who make this their literal job (hint: it’s us).

You can book a Strategy Session to pick our brains or you can hire our team to simply do it for you. Our monthly accounting package includes bookkeeping, tax preparation, tax strategy, and, you guessed it, sales tax filing. No more stressing if you’re doing it right, or got all the states, or charged enough! Let us do what we do best – taxes and accounting – so you can keep on doing what you do best – being the visionary for your business! Schedule a Discovery Call to get started!