Most shoppers bemoan sales tax because it increases the cost of goods and services. That said, the majority of people know that sales tax is needed to balance state and local budgets and pay for things like roads, schools, police departments and fire departments. If you own a small business in one of the states that collects sales tax, it is important that you are charging customers the correct amount on their purchases. Moreover, you need to have a thorough understanding of the current sales tax laws in your state, city and county.
Sales tax rules can be difficult to grasp, especially if you have multiple business locations or sell products online. This Balboa Capital blog article takes the confusion out of sales tax; it is essentially a small business sales tax guide. In it, you will learn how to calculate sales tax. We also explain how to manage, collect, report and file sales tax so your small business can remain in good standing with your state and local governments.
What is sales tax?
Sales tax is collected from buyers on all taxable products and goods that you sell. If you run a service business, your state might require that you collect sales tax on the services you provide. Currently, 45 states and the District of Columbia collect statewide sales tax, and 38 states collect sales tax at the local level. Sales tax rates vary based on the state, city and county, and it is common for sales tax rates to change often.
In order to collect sales tax, your small business needs to have a sales tax permit, also called a sellers’ permit or sales tax license. This permit is issued by the state to small businesses that sell taxable products, goods, or services. The application process for a sales tax permit is relatively easy and straightforward. Just log online and check out the Department of Revenue website for the state in which you reside. All of the information you need pertaining to sales tax and the type of permit(s) that are necessary for doing business will be right at your fingertips, along with a link to apply for a sales tax permit.
The type(s) of business forms you will need to complete your application will depend on the state in which you do business. Additionally, you might need to provide additional information if you have business locations in multiple states, or if you run an online business with no physical brick-and-mortar storefront.
What is sales tax nexus?
You might have heard the phrase “sales tax nexus” before. It refers to a company’s physical presence in a particular state. Let us use an Indiana-based guitar shop as an example. The shop has 3 locations in Indiana, employs 10 people, and has over 1,500 guitars in stock. The guitar shop’s nexus is Indiana and, as a result, the shop has an Indiana sales tax permit. If the guitar shop did not obtain a sales tax permit that is required by Indiana state law, the nexus would not exist.
Simply put, a nexus needs to be established in order for a state to collect taxes. The sales tax nexus can become tricky if you operate an online business. In 2018, a Supreme Court ruling said that all states have a legal right to require online businesses to charge and collect sales tax from all online shoppers nationwide. Tax rules for online shops and online marketplaces such as Etsy and Amazon can be complicated, so spend time reading up on them. This can help you avoid any tax-related issues in the future.
Calculating and collecting sales tax.
After you obtain a sales tax permit and establish a business tax nexus, it is time to start collecting sales tax. To do this properly and accurately, you will need to find out what your local sales tax rate is. As mentioned earlier, sales tax rates differ by state, and some states do not collect sales tax. In some areas of the country, the sales tax rate is higher because it includes state, city and county taxes.
Next, you need to determine which products or services you sell are taxable. If you own a niche business that offers a select number of taxable items or services, this will be an easy task. On the other hand, making a list of your taxable and tax-exempt items will take time if you sell a wide range of goods. Certain foods, prescription medications and medical devices are generally exempt from sales tax.
A simple math formula is all that is needed to calculate the total sales price for your taxable goods and services. Just add the sales price together with the sales tax. For example, a men’s t-shirt that costs $15.00 is selling in a state that has a 6.5% sales tax rate. The tax is .98 cents, so the total price that customers will pay for one men’s t-shirt is $15.98 ($15.00 + .98 cents).
Adding sales tax to your POS system.
Point-of-sale systems make it easy to apply sales tax to your items and services. You can configure your tax settings on the backend of your POS system. Most POS systems have the option of either automatic tax settings or manual tax settings, the latter of which lets you enter rates for a specific state, city and county. Another convenient and time-saving feature included in most POS systems is the ability to input taxes on shipping.
Having all of your sales tax information saved in your POS system ensures that you will keep accurate records and prevent anything from falling through the cracks. When tax season approaches, you can generate comprehensive sales tax reports with just a few clicks of the mouse.
Sales tax rates and rules are known to change frequently at the state and local levels. Please consult with a business accountant or tax advisor to find out what sales tax obligations your small business has, as this blog post is for informational purposes only and should not be viewed as tax advice.