You likely already know how to pay sales tax for a small business in your state. But, let’s say you run a coffee shop in Dallas that sells a cheeky and increasingly popular T-shirt. To keep up with demand (and ease your inbox), you started an online store where people could order the shirt and get it shipped anywhere. So, you ship a shirt to Oregon… and Montana… and Illinois.
Now — what states does your business need to pay sales tax in?
This guide can help you determine your tax liability and identify how to pay any sales tax owed. And seeing as sales tax laws and sales thresholds vary by state, it’s important to research the exact regulations for any state where you ship orders.
1. Research which products or services are subject to local tax.
The rules for the types of goods and services subject to sales tax vary by state. Generally speaking, merchandise like clothing, coffee mugs or umbrellas are taxable sales, whether sold in person or online. If you sell digital items, like online courses or e-books, most states also subject these transactions to sales tax.
To get started on the right foot, you can do a web search for sales tax laws or taxable goods in your state. You can then compare that list to items you sell to identify which items are subject to sales tax — and further, where you might find a small business sales tax exemption.
2. Determine your economic nexus.
The term is a mouthful, but it’s one you need to know. Before 2018, businesses didn’t have to pay sales tax on goods or services shipped to states where they didn’t have a physical location. However, a Supreme Court decision that year changed the rules. Now, out-of-state businesses could have to pay sales tax to states where they ship or deliver goods and services, even if they don’t have a physical location there.
To determine if you need to pay sales tax on out-of-state sales, you need to figure out if you have an economic nexus in that state. To have an economic nexus, you’ll need to meet certain sales or revenue thresholds for sales to that state.
Economic nexus thresholds vary by state, but many states have thresholds of $100,000 or 200 in annual sales.
To help narrow things down, four states currently don’t have economic nexus laws: Delaware, Montana, New Hampshire and Oregon. You won’t have to collect or pay sales tax on sales to those states. However, the other 46 states, plus Washington, D.C., all have economic nexus laws you’ll want to check out to see if your online sales are subject to sales tax.
3. Apply for a sales tax permit with the necessary state(s).
Once you determine where you’ll need to pay sales tax, apply for a sales tax permit from each state’s department of revenue. The registration process is relatively simple and can often be completed entirely online. You’ll need your federal tax ID number and other basic business information. Once your application is complete, the state will issue you a sales tax ID that you’ll use on all reports and tax payments.
4. Determine the sales tax rate to collect.
Your sales tax rate will usually depend on the state where you’re shipping the item and the item type. So, you’ll need to research the appropriate rates and make sure those rates are noted in your point-of-sale (POS) software.
Most states have destination-based sales tax rates, meaning you’ll collect sales tax based on where the item is delivered. A few states charge origin-based rates, which means your local sales tax rate will apply to sales. If your small business is in California, that state has a hybrid origin/destination rate.
5. Collect tax at the point of sale.
Online businesses, it’s time to rest easy. Once you have those sales tax rates coded in your POS software, everything is automatic. When your customers make a purchase, your business will collect the appropriate sales tax at checkout. The beauty of e-commerce solutions is that they’re savvy regarding sales tax.
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6. Track collected sales tax in your accounting practices.
You don’t have to go it alone when tracking how much sales tax you collect and which states must be paid. Your bookkeeper or accountant can easily set up ways to properly track the sales tax you collect throughout the year. Then, when the required reporting and payment intervals roll around, your financial pro can run reports you can use to complete your sales tax filings and payments.
VistaPrint Tip
Reporting time is a good opportunity to check in with a financial professional and see if you have sales that qualify for an economic nexus in a new state.
7. Report and pay collected sales tax.
In this last step teaching you how to pay sales tax for a small business, it’s time to pay out what you’ve collected. You’ve collected the tax. Now, it’s time to pay it out. Given that sales tax reporting intervals vary by state and can be monthly, quarterly, semi-annually or annually, reviewing each state’s requirements is important so you pay on time.
Most states offer a way to file reports and sales tax payments online. And if you keep making your payments on time, many states offer an on-time payment discount. While the discount may only be a percent or two, you never want to pass up free money.
This seven-step process can help your small online business do well in every state your customers call home. And if you have questions, remember: Your financial pro and your state’s department of revenue can help you find the answers to ensure your sales tax practices stay in tip-top shape.
