Sales taxes. They’re different in every state. Some states have no sales taxes at all. Some states tax goods but not services, or tax both goods and services. As a business owner and entrepreneur (especially an eCommerce entrepreneur), there’s a lot that you need to know about collecting and paying sales tax.
What Exactly is Sales Tax?
Sales tax is a tax on purchases (or sales) made within a state or a locality. A retailer must pay sales tax, but they are allowed to pass sales tax on directly to the consumer. This is why sales tax is usually charged at the point-of-sale: it’s an add-on to an existing receipt.
Sales tax can be applied to goods, services, and food, but it isn’t always applied to all these things. In some states, no sales are taxed (income and property tax are used instead). In other states, services aren’t taxed, or food isn’t taxed. And in still other states, there’s no income tax, so sales tax is much higher.
A retailer collects sales tax when the transaction is completed and then pays the sales tax to the relevant authorities, usually at the end of the month. However, tracking sales tax can be complex, as can calculating it. Since sales tax does change from time to time, business owners need to be mindful of their tax laws. A failure to collect sales tax properly can have financial consequences.
How does sales tax work for eCommerce? Online stores need to track both “destination-based” and “origin-based” sales tax. In some areas, you must track sales tax based on where you are. In other areas, you need to track sales tax based on where the buyer is. Since these regulations are fluid, many companies use point-of-sale systems to track their sales tax for them.
How Do You Collect Sales Tax?
Since sales tax is collected at the point-of-sale, it’s collected by the merchant in their bank account. From there, the merchant will usually cut a check to the relevant tax authorities at the end of a specific period. Depending on the amount of transactions completed, that could be monthly, quarterly, or even annually. Sales tax passes right through the merchant’s account: it isn’t taxed again as income.
The local department of sales tax will be able to tell a merchant how frequently their tax needs to be paid. If their tax isn’t paid on time, late fees and penalties will be issued.
While most consumers only see a single sales tax rate, sales tax is actually composed of multiple rates, all of which need to be collected and paid separately. You might have a state rate, city rate, and also a district rate, which is why sales tax varies depending on where you are. Usually the smaller rates (such as city rates and district rates) aren’t collected as frequently as the state taxes are.
Further, within your point-of-sale system, you must have your inventory items appropriately marked as “services,” “goods,” or “food” products, because as noted these aren’t always taxed. It’s very common for a state to tax goods but not services, because with services nothing is actually trading hands.
Before you begin selling products or collecting sales tax, you will need to request a sales tax license. A sales tax license is given out by your state, and it’s necessary for preparing your sales tax returns. There may be a long processing time, depending on the state, so a retailer should always request their sales tax license as early as possible. To get a sales tax license, you will usually need a business tax ID, as well as information about your company’s structure.
Do You Have to Charge Sales Tax?
Some businesses wonder whether they need to charge sales tax or whether they can absorb the cost into their goods and services. It is required that a business pay sales tax for the transactions they’ve completed, but it’s not necessarily required that the business pass these charges on to the customer. They simply have the option of doing so. Some businesses would prefer to have a round number (such as $100) for a purchase.
This is more than possible, but it does require that you back out your sales tax, which is a more complicated calculation. If you have a 6% tax rate, you’ll usually charge $100 for an item and $6 for taxes. If you charge $100 flat for an item, the sales tax isn’t still $6. Rather, the price of the item would be $94.64 and the amount of sales tax would be $5.36.
What About a “Sales Tax Holiday”?
Further complicating matters is the fact that some states and locations have a “sales tax holiday”: a day when people can purchase items (usually big ticket items) without having to pay sales tax. During these days, merchants don’t need to collect or pay sales tax.
Sometimes, these sales tax holidays are only applied to specific things, such as back-to-school goods, so you need to know exactly which items qualify. You will also need to keep thorough records on your sales to make sure that you’ve calculated your taxes correctly.
How Can You Handle Different Sales Tax?
As you can see, the process of collecting and handling sales tax can be a complex one. Luckily, there are many point-of-sale systems and online selling platforms that will help you handle sales tax automatically. Nevertheless, you may want to have a bookkeeper or an accountant take a look at your sales tax payments from time-to-time to make sure they’re being done correctly.
Sales tax is an issue that seems complicated on the surface, but most people are able to appropriately manage their sales tax through professional bookkeepers and automated point-of-sale systems. When considering your income and revenue picture (in addition to your product pricing), you should always keep your sales tax in mind.