Collecting, calculating, reporting, and paying sales tax remains one of the most perplexing — and occasionally irritating — components of running a small business. The issue has only gotten more convoluted as online sales have soared in recent years.

Every taxing authority, whether state or local, has its own set of laws, tax rates, deadlines, and exemptions. It’s no surprise that the Small Company Administration finds that queries about sales tax are among the most frequently asked by small company owners across the country.

If you find it difficult to deal with the intricacies of collecting sales tax for your small business, employing a professional tax accountant to assist you is a wise business decision. You can also seek assistance from your local SCORE, which provides free mentorship to small businesses, as well as your local Small Business Development Center, another SBA-affiliated agency that provides free and low-cost guidance to small business owners. Mentors at SCORE and SBDCs provide expert resources, but they will not do the work for you. If they don’t have the answers you’re looking for, they can direct you elsewhere.

What Is a Sales Tax?

A sales tax is a point-of-purchase tax paid by consumers who buy certain goods and services within the borders of the taxing authority. In the United States, the authority is a government: the state and sometimes a county, city, or township. The levy adds to the cost of the item or service, and it’s included in the ultimate price for the buyer.

Sales tax usually gets triggered when someone makes a retail purchase of a tangible product (something that can be seen, weighed, measured or touched), but the types of sales tax vary from state to state. It can be added to some services.

While buyers bear the legal burden of paying a sales tax, sellers have the responsibility to collect and send it to the correct government agency. Unless specifically exempted, sales taxes are added to cash transactions, credit sales, installment sales, layaway sales, and sales involving trade-ins or exchanges of property.

Also, the federal government — in this case, the Internal Revenue Service — has little to do with sales taxes, which are governed by states and other municipalities. Unfortunately for businesses that sell products in more than one state, this means navigating a web of rules and rates.

If you own a small business or are starting one, you must understand your tax obligations. Otherwise, it could lead to serious trouble, including fines and jail time.

Collecting taxes from your customers and paying taxes to the government should be part of your business plan — and part of the homework you do when you set up your business. If you sell your products online and have customers from other states, this can get tricky. Not knowing the rules can cost you money.

You should be able to answer these questions:

• What is your sales tax nexus? – Nexus is where your business has a presence, but like all other things sales-tax related, it’s not that simple. It’s always in the state where you live and conduct business, even if you’re doing it from your kitchen table, but it extends from there. If you have more than one physical location, particularly in different communities or states, affiliates, or more, that is part of the nexus. Some states also count employees who work remotely in another state, or contractors. Warehouses and distribution centers count, too. If your business sells online to other states, it may have an economic nexus (more about this later).
• Does your state or local jurisdiction require you to get a license to sell or a sales tax permit? – Start by registering with your state’s taxing agency. Find out, too, if you must register in other states where you do business.
• Are your products and services taxable in your state and community? – Once you know that, you also have to determine what rate to charge, as well as if it differs in other states you sell in, as well as if it differs among products.
• What are the specific requirements for collecting sales taxes if you sell online, and how do these apply to the states you sell in? – In 2018, the U.S. Supreme Court decided in South Dakota v. Wayfair that each state sets its own rules for out-of-state sales. Many states give a break to businesses with less than $100,000 in sales, or a certain number of transactions, but some have rules even for small businesses.

How Do I Actually Collect State Sales Taxes?

Once you’ve determined where you stand in the sales tax picture, it’s time to figure out how to collect state and local sales taxes and deliver the money to the right location. The primary procedures include obtaining a seller’s permit, understanding and adhering to the local tax rate, and filing tax returns with the state or taxing authority. If you find it too complicated to navigate on your own, seeking assistance from a professional or mentoring organization can help. It’s well worth the investment to prevent legal complications and fines.

Taxable Goods

While the list of taxable goods seems endless, there are some common categories.

Taxable goods include:

• Furniture
• Motor vehicles
• Computers
• Home appliances
• Electronics
• Books
• Toys
• Raw materials (lumber, cloth, etc.)
• Gardening items, including plants
• Rental Properties

Taxable Services

Services can also be subject to a sales tax. While these vary too, some of the common ones include the following.

Taxable services include:

• Personal property services like installing, inspecting, maintaining, and repairing items for customers
• Real property maintenance services on customers’ property, like lawn mowing and landscaping, snow removal and repairing utilities
• Business services such as advertising, consulting, marketing, public relations, and human resources
• Personal services including beauty care, pet grooming, dry cleaning, tour or outdoors guide

Digital Goods and Services

Online transactions changed the sales tax landscape, and it continues to evolve as taxing agencies figure it out (and covet more money). More and more businesses — even small, home-based businesses — are “remote sellers,” meaning they sell goods in areas where they have no nexus.

Read Also: How Long Does NY State Tax Return Take?

The emergence of marketplace sellers like Shopify, Etsy, Bookshop.com and other places where entrepreneurs can sell goods without having to manage their own selling website, boosted online sales for small businesses. And shutdowns from the COVID-19 pandemic spurred many small businesses that were focusing on brick-and-mortar sales to sell online.

According to the U.S. Census Bureau, which tracks online sales, e-commerce sales accounted for 14.6% of total sales in 2022. The total was $1.03 trillion. Sales in 2010, the first year of Census Bureau figures, were $165 billion.

The South Dakota v. Wayfair decision made online sales subject to sales tax. The court left it to the states to determine how to tax online sales, since the states are already setting their own tax rates and rules. In most states, online taxes don’t apply to smaller businesses, with size determined by sales, number of transactions, or sometimes both.

The general maximum is $100,000 in sales or 200 transactions, but that differs widely by state.

Some states base the tax dollar amounts on sales. For others, it’s transactions. And some use both. Further complicating things, the sales threshold may mean gross sales, gross revenues, retail sales, or taxable sales, depending on the state.

The Streamlined Sales Tax Governing Board provides state-by-state updates, including a chart, on how the online taxes work for remote sellers, but also urges business owners to check with individual states for the last word on what’s required.

Sales Tax Exemptions

Exemptions from sales tax vary by state. It is critical for a small business owner to understand which state and local tax rules apply to their business, as well as which exemptions apply. It is the buyer’s responsibility to demonstrate eligibility for exemption by producing a valid certificate indicating the buyer’s consent to waive sales tax payment.

Businesses and those seeking exemptions must check their state’s guidelines. However, there are general exemptions based on the type of goods, or “property,” being sold, the purpose of the property, and the buyer’s identification.

Exemptions Based on Type of Property

Most states offer product-specific exemptions on items that are considered necessities, including food (though there are a variety of exceptions to this, depending on the state), medicine and medical devices. In some states, these items are still taxed, but at a lower rate. Most states also offer an exemption from sales tax for occasional, casual, or isolated sales, such as a yard or garage sale, or estate sale.

Exemptions Based on Use of Property

Wholesale items being resold aren’t usually subject to sales tax. Raw materials for an ingredient or component of an item being manufactured, processed, assembled, or refined for future sale are also typically exempt.

In addition, there are exemptions for products provided to support certain industries — such as agriculture, manufacturing, and industrial processing — or to encourage certain activities for the public good, like pollution control.

Exemptions Based on Identity of Buyer

States cannot tax sales that are made to the federal government or its agencies, state governments or their agencies, cities, counties, or other local jurisdictions. Also exempt, in most states, are sales made to nonprofit, charitable, religious, and educational organizations if the sales are specifically for the organization’s nonprofit purpose.

The Internal Revenue Service determines nonprofit status, and the states follow that guidance when deciding if an organization must pay sales tax. You can find information on how to apply for nonprofit status and what businesses that are already nonprofits on the IRS website.

To be considered a tax-exempt nonprofit, an organization must fall into one of these categories:

• Educational
• Religious
• Charitable
• Scientific
• Literary
• Fostering certain national or international sports competitions
• Testing for public safety
• Preventing cruelty to children or animals

Sales Tax Permit

All businesses that sell taxable goods and services must have a sales tax permit, sometimes called a certificate. The place to start is your state’s revenue department. In most states, getting the permit is free, though some charge a fee. You’ll need your Employer Identification Number, as well as other information about your business, so be sure you have all your business formation paperwork handy when you apply.

Sales Tax Rate

To determine the sales tax rate your business will charge, start with your state’s revenue agency. Check with your municipality as well – many, particularly large cities, and some counties, also charge a sales tax. Rates may differ for different goods and services you offer, so be sure you’ve checked the details. Sign up for updates if your state has that service because sales tax rates can change frequently.

Records & Reporting Sales Taxes

Documenting taxes collected, including in your invoices, is vital for a small business and is part of the record you must maintain to make reporting and paying taxes legal and efficient. While requirements vary from state to state, all will want records of the tax collections your business has made in some form.

Know what your state and local requirements are for reporting. Some may ask for receipts from each sale. Your state will also have a schedule for reporting the sales tax your business has collected and how the reporting must be done. This, like everything else regarding sales taxes, varies from state to state.

Calculating Sales Tax

The state or other taxing entity may collect taxes every month or every quarter, depending on the volume of business you conduct. Businesses remitting their collected sales taxes file a return, either a simple one, or one with specific breakdowns. Each state has a specific form with specific guidelines about how much information to provide. Some states have a variety of tax forms that are specific to an industry.

If you do a low volume and don’t have a large variety of goods and products, it may be simple. If your sales are more complicated, you may need to provide a specific breakdown of what you sold and what taxes you collected for different items, or for different sellers. Most states allow businesses to file electronically.

Also, keep track of exempt buyers and resellers. Even though they’re not paying taxes, you must include that sales information on your return.

Businesses must file a sales tax return, no matter what they sell or to whom they sell it. Even if you are a service-based business that doesn’t sell a product, you must submit a sales tax return (full of $0.00s). Not filing can trigger fines and legal issues.

Staying informed about your small business’s sales tax obligation is an important priority, and this includes calculating the sales tax rate. This may seem simple on the surface — it’s the price of the item, plus the amount determined by the tax rate. For instance, if an item is $10, and the sales tax is 8%, then the price the buyer pays, with tax, is $10.80.

But that’s assuming that all your products are taxed at the same rate and all your sales take place person-to-person. In reality, you must account for the differences in sales tax rates, and set up your records for different tax groups.

Tax groups include:

• Store sales: What is sold directly to customers in your store or from a vendor or trade booth.
• In-state sales: Sales to customers in your state, which is also simple if your state doesn’t have county and local sales taxes and has an origin-based tax method, meaning the rate is based on the seller’s nexus. If your state has varying sales taxes and a destination-based method, where the rate depends on the buyer’s location, this requires more attention.
• Out-of-state sales: Taxes on sales to buyers in other states also can vary depending on whether the state where your business is located is origin or destination-based, as well as whether your business is large enough to exceed online sales tax exemptions in other states.

You should also calculate what your business must pay in sales taxes for supplies, equipment, and other goods, relying on the same criteria, but with your business as the consumer. The complexities of sales taxes may lead you to charge a sales tax on everything you sell. That is not a good idea. You cannot tax your consumers on non-taxable things. If you do, you risk being punished by the state or perhaps charged with tax fraud.

Take the effort to understand the complexities of your state’s legislation. Begin with the state revenue agency, and lead a representative through your product line to identify all taxable goods. Tell the representative what you sell and whether you offer it online.

When you sell online, if your store satisfies the threshold for the states in which you sell goods, the items will be subject to the applicable state sales tax.

Items that you’ll want to cover if you sell them, including food, beer, wine, and liquor. While food usually isn’t taxed, 15 states do it. Some charge taxes on all groceries, though most at a lower rate than other retail items.

One way to keep track long-term is to use point-of-sale software that does the heavy lifting for you. You could also hire a business tax service. But start with the state tax revenue department. Because the state wants you to comply, it’s often generous with its help.