How to calculate sales tax for your business

When you started your own business you were probably psyched to share your products with the world, create your own schedule, be your own boss and control your own destiny. One thing I’m willing to bet you were less excited about, if you thought about it at all, was the wild world of sales tax.

Let’s face it, if you sell products, sales tax is going to be a necessary evil, just like accounting, inventory management and all the other backend administrative hassles that you can find yourself spending way too much time on.

When you’re on the buyer’s side of the transaction, sales tax is fairly easy. If you purchase a product in one of the forty-five U.S. states (or D.C.) that has a sales tax, you will generally pay 4-8% of the purchase price of an item in sales tax. As a buyer, you may grumble about it, but you’re done once you give your credit card number.

But as a seller, especially if you sell your products online, your sales tax headache is just beginning. You have to:

Figure out which of your customers get charged sales tax
Determine how much sales tax to charge
Get registered with your state (or states)
Set up all your seller channels to collect sales tax from buyers
Report how much you’ve collected, and in which taxing jurisdictions
Actually file a sales tax return!

If all that sounds like more trouble than you bargained for, don’t worry. I’ll break it down:

Which customers do I charge sales tax?

In a nutshell, charge sales tax to customers in states where you have sales tax nexus.

Sales tax nexus is just a fancy way of saying states where you have a “significant presence.” You always have nexus in your home state, even if your home office doubles as your kitchen table.

Other activities that can cause nexus in additional states, though, include:

A location – A store, office, warehouse, or other physical location.
Personnel – An employee, contractor, salesperson or installer.
An affiliate – In states with click-through nexus, a 3rd party affiliate can create sales tax nexus.
A drop shipping relationship – Three-party transactions can get tricky and sometimes create nexus.
Temporary business activities – In many states, temporarily selling at a trade show or craft fair can create sales tax nexus.

What do I do when I have sales tax nexus?

Once you’ve determined you have nexus in a state, your next step is to get registered with that state for a sales tax permit. (This is sometimes called a seller’s permit or sales tax license.) Don’t skip this step or start collecting sales tax before you have your state ID number! States consider it unlawful to collect sales tax without a permit.

Here’s a guide on how to register for a sales tax permit in every state.

How much sales tax do I charge?

Sales tax rates are usually made up of a few factors – a statewide rate and some local rates such as county, city or other “special taxing district” rates. A few states are nice and only have one flat statewide sales tax, but in most cases tax rates can vary from local area to local area. You can read more about that in “Anatomy of a Sales Tax Rate.”

So if you have a brick and mortar store, live in a state with sales tax, and sell products that are taxable (hint: most tangible products are taxable), then your sales tax life is fairly simple. Charge sales tax at the location of the point of sales (i.e. your store.)

But selling online is where things get complicated. Some states are origin-based and some states are destination-based when it comes to sales tax. In origin-based states, you charge sales tax from where the sale originates—your location. That’s fairly simple. You figure out the state rate plus any local sales tax rates at your location and charge all of your buyers that rate.

But destination-based states—i.e. most states—are more complicated. You are required to charge sales tax at the buyer’s ship-to location.

Example: You live in Stamford, New York. New York is a destination state, so you are required to collect sales tax at your buyer’s address. So if you operate your business in Stamford but sell to a buyer in Buffalo, you are required to charge your buyer the Buffalo sales tax rate of 8.75%. That 8.75% tax rate is made up of New York’s base 4.0% sales tax rate, plus the Erie County sales tax rate of 4.75%.

To make matters even more complicated, most states that are origin-based when it comes to in-state sellers become destination-based for remote sellers. A “remote seller” is someone who has nexus in a state but isn’t based in that state.

Here’s another example: You are based in Georgia, but have hired your brother in Missouri to help your thriving eCommerce business grow. Because you have an employee in Missouri, you are now considered a remote-seller with sales tax nexus in Missouri. Missouri is an origin-based sales tax state when it comes to in-state sellers, but it’s a destination-based state when it comes to remote sellers. Since you are a remote seller in Missouri, you would charge buyers in Missouri sales tax based on their ship to location.

Read here for a thorough explanation of origin-based and destination-based sales tax.

Some states also require that you charge sales tax on shipping or other delivery charges. Here’s a guide to sales tax on shipping charges.

Complex? You bet. But you’re a savvy business owner and you’ve got this!

human face with currency and numbers exploding from brain

How do I charge sales tax?

After reading that last section you may be scratching your head over how you could ever possibly collect the correct amount of sales tax. Fortunately, many online sales platforms and shopping carts you can use will collect sales tax for you, or at least allow you to set up your own sales tax rates.

For instructions on how to set up sales tax collection on the most commonly used eCommerce channels and shopping carts like Amazon, eBay, Shopify, Bigcommerce, Magento, WooCommerce and more, check out TaxJar’s Sales Tax Guides.

If you’re a developer or have more robust sales tax needs, TaxJar’s SmartCalcs Sales Tax API will take care of sales tax collection for you, too.

Okay! I’ve charged the right amount of sales tax to the right customers. Now what?

When you registered for your sales tax permit, the state assigned you a filing frequency. This frequency could be monthly, quarterly, annually or, in rare cases, semi-annually. States have different criteria for assigning you a filing frequency, so if you have sales tax nexus in more than one state, you may find yourself paying one state monthly and another annually.

When your state sales tax filing due date approaches, your next step is to report how much sales tax you collected from buyers in that state over the taxable period. (Example: If you file quarterly, your taxable period may be January 1st through March 31st. If you file annually, your taxable period may be the whole year 2016. Remember, your state will tell you your filing frequency when you apply for your sales tax permit.)

But there’s a catch. While a handful of states are friendly and just want to know how much sales tax you collected from buyers in the state, most states are… less than nice. They want you to break down how much sales tax you’ve collected not just from buyers in the state, but by county, city and other special taxing jurisdiction. For them, this is the only way they can allocate to which local areas the money should go. After all, sales tax pays for things like schools and roads. But for you, this means a major headache. Imagine poring over all of your sales for the past year and then figuring out which city, state and other taxing district they happen to fall into. It gets even more complicated if you sell on more than one online channel or shopping cart, or if you sell online and at a brick-and-mortar business.

For many years, this process required spreadsheets, state tax tables and lots of time and headache.

This is where TaxJar comes in. TaxJar integrates with the channels you sell on and creates return-ready reports so you don’t have to. All you have to do is take your TaxJar state report, login and fill out your tax return. Or, if you’d rather not deal with it at all, TaxJar will also file your sales tax returns for you in most states.

Speaking of…

via www.efile.com

How do I file a sales tax return?

As your sales tax filing deadline approaches and you’ve reported how much sales tax you’ve collected, your next step is to actually file your return.

Most states allow you to file your return online or, if you prefer, by mail or phone. You can generally remit the sales tax you’ve collected online by electronic funds transfer (EFT) from a bank account.

A couple of important notes:

Zero returns: If you have a sales tax filing due date, you should generally go ahead and file a return even if you didn’t collect any sales tax. If you don’t do this, at the least your sales tax permit could be cancelled and you’ll have to apply for another one. But worse, some states will actually charge you a late filing penalty. Nobody wants to pay a $50 penalty on a $0 due sales tax bill!

Sales tax discounts: In brighter news, some states realize just how hard this whole sales tax thing can be for merchants and they give you a little break. If you pay on time, about half the states will give you a very small percentage discount that you can keep in your pocket as long as you pay on time. Here’s a list of state sales tax discounts.

And that’s it! You’ve filed your sales tax return and you’re all set. That is, until your next sales tax filing due date rolls around.

We hope this explanation has made sales tax a little less daunting. Can’t get enough sales tax? Then check out our comprehensive Sales Tax 101 Guide or ask a question to over 4,000 fellow merchants and sales tax experts over at SalesTaxCommunity.com.