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Sales Tax FAQ: All Your Sales Tax Questions Answered

by
Spencer Wilson
on
6/23/2021
Sales Tax FAQ: All Your Sales Tax Questions Answered

When you decide to start your own business, there are a million details — large and small — that need to be addressed. One that may not be top of mind, but needs consideration, is sales tax.

Collecting, reporting, and paying sales tax is a responsibility that most businesses need to pay attention to, whether they are selling a product or a service, in-person or online. Knowing your sales tax obligations is made more challenging by the fact that rules can change frequently, especially in the fast-changing world of online sales.

To make sure that you know what you're supposed to do, we have put together a list of sales tax FAQs and answers below. We will address registering for sales tax, what items are (or are not) taxable, what your obligations are regarding sales that are outside of your state, the different tax rates imposed by each state, sales vs. use and excise taxes, and sales obligations for online transactions.

Am I Responsible for Charging Sales Tax to my Clients?

Knowing your sales tax obligations starts with the state in which you do business. If you're operating in Delaware, Montana, New Hampshire, Alaska, or Oregon, you have nothing to worry about, as these states have no statewide sales tax, (though there are some municipalities in Alaska that do.) Outside of those five, all other states can make you charge sales tax if your business has what is known as a nexus — or physical presence — within their boundaries.

Nexus is determined by a few different elements. These include:

  • Employing an agent, salesperson, solicitor, canvasser or representative there
  • Having a physical space such as a warehouse, office or distribution center there

In recent years, as internet sales have boomed, some states have added selling more than a specific gross sales amount or number of transactions within their state as a nexus, with the specifics of these thresholds determined by each individual state.

What is the Sales Tax Rate in My State? 

Upon determining that you are required to charge sales tax, you need to determine exactly what your state's and, in many cases, added local sales tax rate is for the products or service that you sell. A sales tax rate is simply the percentage of the total sale of an item or service that is charged by the state or locale, and it is determined by each individual state. To look up the sales tax rate for different locations, consult this article that the Tax Foundation published in 2020.

How Do I Know Whether the Items or Services I Sell are Subject to Sales Tax?

Even if your state does charge a sales tax, that doesn't necessarily mean that the items or services you sell have a sales tax obligation. In some cases only tangible products are taxed, while others like the states of New Mexico, Hawaii and South Dakota tax both products and services. Like many other aspects of sales tax, the rules in each state are constantly evolving so it's important to check with any state in which you have a nexus to make sure that you are aware of the most current rules.

There are many perplexing aspects of determining whether you are obligated to pay a sales tax on what you sell. One of the most consistent challenges is that it can be hard to distinguish between a product and a service. In many cases you are selling something that is not clearly what is known as a “true object”, but the fact that something isn't tangible personal property does not necessarily mean that it can be classified as a service (and therefore nontaxable in many states). If your state uses a “true object to test” to decide whether a given sale is for the service that created the product or the product itself, make sure that you are familiar with how it works.

Am I Required to Charge Sales Tax for Internet Transactions?

There's a pretty straightforward rule of thumb about taxing sales that are transacted via the internet. If your clients are located in the same state that you are, then you're supposed to impose a sales tax, and according to the recently decided Supreme Court Case South Dakota vs. Wayfair, the same can be true whether you have a “presence in another state” or not. To get a sense of the guidelines for each state for sales taxes, read this article published by the Streamlined Sales Tax Governing Board, which provides all the information that you need, including the remote seller threshold.

What Does My State Taxing Authority Need Me to Do? 

If you find that you are obligated to collect sales tax, your next step will be to consult with the state's taxing authority, and following that you need to apply for a seller's permit. This step means that you are confirming that you either have a physical office or space, including a warehouse or storage area, in the state from which you conduct business, or that you have employees, salespeople, independent contractors or agents based in the state, or that you sell or ship products to clients in that state.

Registration and sales permitting is also required for online sellers, as well as if you meet any requirements having to do with nexus (such as minimum number of remote transactions in a state or minimum amount of revenue from a state.) To determine your specific sales tax requirements, consult this IRS article, which contains information on all fifty states and provides a convenient link to the taxing authority for each state. You should also take the time to determine whether any state that you are based in or are required to collect sales tax in uses the Streamlined Sales Tax Registration System (SSTRS).

To complete the registration process with a sales tax authority you will need your federal business tax ID Number or Employer ID Number, which is available from the IRS. You'll also need your NAICS Code or codes, which you can learn more about here.

How Do I Collect, Report, and Pay Sales Taxes?

Understanding your sales tax obligation and the process you need to follow to meet it is highly specific to the state or states in which you do business. For more information make sure to consult with an accountant or tax professional or visit the specific state's tax website for guidance.

If I Run My Business from My Home, Do I Still Have to Collect Sales Tax?

The short answer here is yes. If the item or service that you sell is one for which sales tax needs to be charged, then it doesn't matter whether you sell it from your home, an office, or anywhere else. You are obligated to apply for a selling permit and to register, collect sales tax, report to the state tax authority and remit payment.

Am I Required to Collect Sales Taxes on Out-of-State Sales?

This is a complicated issue, and the answer depends upon a number of different circumstances, including whether you meet the requirements of a nexus in those and other variables. If you do have to pay them, you can identify the amount that you owe by visiting the location's tax website or looking up tax rates by a client's delivery zip code.

What is a Local Option Tax and Am I Supposed to Charge It? 

A local option sales tax is charged separate and apart from the general sales tax charged by a state and is almost always designed to fund a specific project or need within a locale. Though it is a complication, as a seller you do have a responsibility to determine whether a customer is located in an area that charges a local option tax and to arrange to process it. This can be done here using the client's delivery zip code.

What is a State Sales Tax Holiday?

Though not all states offer them, state sales tax holidays offer a real boon to consumers and merchants alike, as they dedicate specific days throughout a year on which purchases of goods or services are freed of sales tax. In some cases, the sales tax holiday is for specific items, for example for back-to-school clothes and supplies in the days prior to school reopening each year. Information on the states that offer sales tax holidays and the specifics on dates can be found in this article written by the Tax Foundation.

If you have additional questions about sales tax and your business, reach out to your tax professional or accountant.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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