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Navigating sales tax as a business owner

by | Feb 1, 2018 | Sales Tax, Small Business | 0 comments

With the freedom of being a small business owner comes the responsibility of navigating sales tax. If you’re confused about sales tax, you’re not alone! Collecting and paying sales tax is one of the more complicated aspects of running a small business, both online and off!

If you ask yourself any of the following questions, then this post is for you.

  • When does sales and use tax apply?
  • What transactions are exempt?
  • What happens if you are selling online or to someone outside your sales tax municipality?
  • How do I pay my sales and use tax?
  • Are services taxed or is it only goods?

Whether you’re starting a new business or expanding an existing one, here’s what you need to know about sales and use tax obligations.

What is sales and use tax?

It is a state and local government tax that is paid by the purchaser for goods and services received. Business owners should check with their state government to see if they must charge customers sales tax for any product or service they offer. As the owner of a business, you are required to charge sales tax, collect it from your customer and remit it to the appropriate government authorities within a specified time period.

Sales tax rates and laws vary from state to state and even within cities and towns within a single state. It really is confusing, especially if you sell to customers in more than one state.

Currently, the following states do not have a state sales tax at all – Alaska, Delaware, Montana, New Hampshire, and Oregon. However, localities within these states might impose their own local sales taxes.

TIP: If you should have collected taxes and didn’t, then you can be personally liable for any sales tax you should have collected and owe.

What is a sales tax permit and who needs one?

A sales tax permit allows you to collect sales tax on behalf of your customers and then remit it to the right government authority.

Except for the states that have no state sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon), you will be required to get a sales tax license for your business. You may even be required to get one from your local government (city or town) as well.

How to Register for a Sales Tax Permit

In general, these are the basic steps to register with a state to receive a sales tax license:

  1. Gather important business info like your EIN or Social Security Number (if a sole proprietor).
  2. Visit the State’s Department of Revenue website.
  3. Search or click on the “Sales and Use Tax” section of the website.
  4. Click the link to register your business.

Every state and every website is slightly different, so I can’t give exact steps for each.

Here are sales tax registration websites for the top three most common full-time RV states:

When do I pay the sales tax?

Generally, states require businesses to pay the sales taxes they collect quarterly, monthly or annually depending on your state and the business income. You’ll file a return specifically reporting your sales tax. On this form, you’ll show all sales, taxable sales, exempt sales and amount of tax due.

Not paying or filing on time will result in penalties. Check with your state and local government about the process in your particular location.

What transactions are exempt from sales tax?

Unfortunately, individual states vary a lot on this subject. I highly advise you to check with an individual state government as to which goods and services sold in that state are subject to sales tax.

Generally, a business is not required to collect sales tax for the following transactions:

  • Wholesale Items – Retailers and resellers don’t pay sales tax on wholesale purchases. Instead, the end consumer will pay sales tax on those items at the final point of sale. For example, if you buy photographic prints for resale you should NOT be paying sales tax. When you make the final sale to your customer of one of those prints, you will collect the sales tax on that item.
  • Raw materials – Raw materials used in the production of your goods for sale are not taxed to you. For example, if you knit hats and gloves, the cost of the yarn should not be taxed to you. When you sell the hat to your customer, you will collect the sales tax on that item.
  • Nonprofits – Sales made to nonprofits are exempt from sales tax.

If you are involved in wholesale transactions, you should get a copy of your tax-exempt certificate issued by the state. If you have a retail sales tax license, many times this serves as your tax exempt certificate. 

Lastly, you may find that many states do not require sales tax collected on items shipped out of state. Let’s dig into this further. 

Selling to customers in different states

A common scenario for online businesses and RVers, in particular, is selling items across state lines. This is a complicated gray area of sales tax law and can be confusing.

How do you know which state rules to follow?

Here’s what you need to know:

  • If you have a physical presence in a state (also known as a “nexus”), you MUST collect sales tax from customers in that state. Physical presence includes:
    • An office
    • Any employees
    • A warehouse where inventory is stored
    • Drop shipping from a 3rd party provider
    • Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
  • If you don’t have a physical presence in a state, then you may still be required to collect sales tax.

That’s right. You may still be responsible for sales tax in a state in which you don’t have a physical presence. The laws are changing quickly around this matter, so pay attention.

I only sell online. Now what?

This is where it gets tricky.

If you sell strictly online and ship to your customers, you may need to collect sales tax for any shipment. If you’re still not sure whether to collect sales tax for items, research your particular state. It should have all this information on the department of revenue website.

If you determined that your business must add on a sales tax charge for transactions in certain states, you’ll need to determine which sales tax rate to charge.

Sound overwhelming? Yes, it can be. With thousands of sales tax jurisdictions in the U.S., determining which sales tax rate to charge is no easy task.

If you operate an online business, it’s worth investing in an online shopping cart service to handle sales transactions, many of which will automatically calculate sales tax rates for you. An example of one of these services is WooCommerce on WordPress. It automatically calculates tax rates based on shipping zip codes.

I sell a service. Is that taxable?

There are many states that tax services, not just goods. Services that are taxed include design, photography, accounting and more. You’ll need to research your particular state to know if you need to charge tax on any service you offer.

As for states that are common to full-time RVers or nomads, I do know that both Texas and South Dakota have a service tax while Florida does not. To learn which specific services are taxed in each state, visit their website:

Still have questions about sales tax? Start the conversation in the comments!

 

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Hi! I’m Heather Ryan, EA and I live full-time in an RV with my husband and two dogs. As a full-time digital nomad, I understand many of the unique tax situations created by travel. I also fully support entrepreneurs and the struggles they face. The goal of this site is to offer my knowledge through advice and tips to real-life situations and questions.

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Disclaimer:

This website is for general information only and is not intended to substitute for obtaining legal, accounting or financial advice. It is not rendering legal, accounting or other professional advice. Presentation of the information on this website is not intended to create a client relationship. For specific tax assistance please consult a tax professional on an individual basis.

While I make every effort to furnish accurate and updated information, I do not guarantee that any information contained in this website is accurate, complete, reliable, current or error-free. I assume no liability or responsibility for any errors or omissions in its content.