Looking how to charge sales tax in 2023 but not sure where to start? Our 6-step guide has got you covered! From determining your tax nexus to registering with tax authorities, we provide a roadmap to help you navigate the complex world of sales tax. Get ahead of the game and ensure compliance with our expert tips and advice. Don't let sales tax hold you back - find confidence in your sales tax process today!
To put it simply, sales tax is a type of tax that is imposed on the sale of goods and services by the government.
It is typically calculated as a percentage of the sale price and added to the total amount that a customer pays at the time of purchase. The responsibility for collecting and remitting sales tax usually falls on the seller or retailer (with exceptions) , who is required to report and pay the tax to the relevant tax authority. The specific rules and rates for sales tax can vary depending on the location and type of goods or services being sold.
Sales tax is collected in 45 states and the District of Columbia. Beyond that, it is also collected at a local level. There are currently five states that don’t collect sales tax at the state level: Alaska, Delaware, Montana, New Hampshire, and Oregon.
You are only required to collect sales tax if you meet certain thresholds and establish a significant business presence in the state, which is referred to as “sales tax nexus.” So let’s get into how to register!
Nexus is another word for connection. States' nexus with companies enables them to collect sales tax from their business operations. Sales tax nexus is just the minimum connection a business must have to be liable for sales tax in that state.
Economic Nexus: In 2018, the landmark South Dakota v. Wayfair, Inc. expanded the definition of nexus to include economic nexus. To sum it up, if you sell enough in a state, there’s a chance you have to register, collect and remit sales and use tax there, regardless of whether or not you have physical operations in the state. Even if your business is based out of one state, economic nexus requires businesses to pay taxes to other states if they meet or exceed that state's economic nexus threshold.
Your business will trigger economic nexus when it passes a certain number of total transactions or exceeds a set amount of revenue in a state. Some states need both transactions and revenue thresholds to be met for it to trigger, other states just need one. These nuances and changes in state legislation are one of the many reasons it’s important to conduct a yearly nexus review.
Physical nexus: Qualifying criteria for physical nexus varies by state. Obviously, an office or a retail location will trigger physical nexus. But so can a warehouse, a remote employee or even a contractor. You could even have physical nexus as an FBA (Fulfillment by Amazon) seller if your products are stocked at an Amazon fulfillment center in a state. It all depends on the location.
Here are some examples of potential physical nexus triggers:
Another thing to monitor is to watch tax sourcing rules for each state. Meaning, be cognizant of which state has the right to tax transactions. It’s typically the destination state, but the rate may be sourced either based on the origin or destination of the shipment within the state.
Origin-sourced sales are taxed where the seller is located whereas destination-sourced sales are taxed where the buyer purchases the item sold.
Once you determine where you have nexus, your next step is to figure out if your product is taxable.
Each state has its own sales tax legislation, rules, and exemptions on what products and services are taxable; therefore, knowing the taxability of a product or service can be especially complex. You may have nexus, but don’t sell taxable items. Or you may sell taxable items and not have nexus. But you need to know if what you sell is taxable in each state to know whether you should be collecting tax where you have nexus.
While the most tangible personal property is subject to sales tax, there are some that are exempt from sales tax or subject to a different rate.
This is a crucial step, it’s typically against the law to collect sales tax in a state without a permit. Once you’ve determined you have nexus in a state, the state will require you to secure a sales tax permit before you start collecting sales tax.
Go to your state’s Department of Revenue website to register for a sales tax permit. Sales tax permits are usually free, but depending on the state they may come with a small fee ( usually between $10 to $100).
Once you register, the state will inform you how often they want you to file taxes and when. Generally, it will be monthly, quarterly, or annually.
If you are just starting sales tax collection for the first time you need to choose a sales tax service you can trust. There are all sorts of options ranging from automation software to companies that specialize in sales tax specifically. When seeking out a sales tax service, it is vital you do your due diligence. Ask questions, deep dive into their experience to determine that the provider has the skills and knowledge necessary to manage data in an efficient and effective manner. Determine if you are needing something simple that automation can cover or if you would benefit from a consultative approach. These are all important things to sort through and figure out during this step.
Begin this step by thoroughly determining how much sales tax you’ve collected from buyers in each state you have nexus. You’ll have to research the requirements of each state as each state may have a different approach depending on their laws. This part can become complicated as the state will want to know the total amount of sales tax you’ve collected from customers in their state and they also typically require you to break it down by county, city, or district.
Each state varies in its requirements but generally, these are the steps to prepare your sales tax report:
It is crucial to keep accurate records and submit your report in a timely manner to avoid any penalties or interest. It is recommended to consult with a sales tax professional if you have questions or concerns as sales tax compliance can get complicated. Furthermore, if there are missteps in your process it could be devastatingly costly to you and your business.
It can feel overwhelming trying to find the help you need. If you run a business, you already have a lot of things to keep track of. Putting state sales tax on your plate is daunting and sometimes unrealistic. It takes an expert to keep track of all of these nuances. Working with a sales tax professional is how you can truly get peace of mind when it comes to tackling the ins and outs of sales taxes.
One thing that makes Peisner Johnson unique to the sales tax industry is our process. Hop on a free ‘Whats Next Call’ and we can chat with you about our process from start to finish all while providing answers and guidance with any sales tax concerns.
As we always say, “Collaboration builds confidence.” Working with a sales tax professional will help give you peace of mind and confidence knowing that you're getting the guidance and sales tax help you need. We look forward to hearing from you!
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