Nearly every state charges sales tax, but they look to business owners to collect the taxes. With the Coronavirus pandemic impacting the ability for businesses to stay afloat; managing the collection of sales tax has likely not been top-of-mind. Knowing when to collect your small business sales tax can be a little tricky, but fear not. This guide covers the major rules while also giving you a step-by-step process for how to pay sales tax for small business owners.
COVID-19 Relief for Sales Taxes
State and local governments appreciate that processing sales taxes is more difficult during the immediate COVID-19 crisis. Most have created some sort of relief including extending their tax return deadline, delaying when businesses should submit taxes, and waiving interest plus penalties on late payments.
Avalara also put together a list of each state’s COVID-19 relief for sales taxes.
Small Business Sales Tax Overview
According to Sales Tax Institute, each state determines if they will charge sales tax. Local governments are often also given this opportunity. Currently, 45 states and Washington D.C. charge sales tax, and five states are exempt: Alaska, Delaware, Montana, New Hampshire and Oregon.
Even though the customer is ultimately paying the tax, it’s your responsibility as a business owner to properly calculate the amount each customer owes, collect the right amount and then submit it to the government.
Governments don’t tax every purchase, as it depends on what’s being sold. It’s more common to owe sales tax on physical products like clothes, cell phones and meals at a restaurant. However, most state governments don’t charge sales tax on necessities, like packaged food at the grocery store or medicine. Some states also don’t tax buying equipment and machinery to run certain businesses, like manufacturing.
Governments don’t always charge sales tax on services. Retail services like a haircut are usually taxed, but a doctor’s bill might not be. What makes the process more complicated is that each state and local government has different rules for what’s taxable. For example, Maryland charges sales tax on clothing but Pennsylvania doesn’t.
In-State and Out-of-State Sales
You’ll definitely need to follow the sales tax laws for the state and town/city where your business is located. If your small business makes sales to customers in another state, you may also need to collect taxes for that government as well.
This has gotten more complicated in the digital age. Before, businesses only had to collect sales taxes in states where they had a physical presence, like a store or warehouse. But with the growing shift to online sales, the Supreme Court launched new standards. Now, many states require businesses to collect sales tax in areas where they don’t have a physical presence.
It usually depends on how many sales you make and the total value of the transactions. For example, out-of-state business owners only collect sales tax for Arkansas if they make over 200 transactions or sales worth over $100,000 to Arkansas residents. Avalara, a tax software company, has listed out the rules for each state.
Exemptions and Sales Tax Holidays
Governments can offer exemptions, where they don’t tax sales in certain situations. Some possible exemptions are because you sold goods to the government, to a nonprofit or to another business that will resell the materials/product.
For example, Steve is a chicken farmer in Virginia. He sells eggs both directly to consumers and to local businesses like restaurants and bakers. He needs to collect sales tax when he sells directly to consumers, but not when he sells to other businesses who will use the eggs for their own products, as that counts as an exemption according to the Virginia government.
In addition, the Sales Tax Institute notes that states can hold sales tax holidays, days when they don’t charge taxes, to promote customer spending. For example, Connecticut has a back-to-school sales tax holiday in August during which they don’t charge tax on clothes.
How to Pay Sales Tax for Small Business
1. Figure Out Whether Your Sales Are Taxable
You could call your state’s department of revenue for information or visit their website, as they should list the rules. You could also contact a local accountant or sales tax professional to see whether you need to collect tax. If you’re on the fence, this article can help you figure out if it’s worth hiring an accountant.
2. Register for a Sales Tax Certificate
Before you can charge sales tax, you’ll need to register for a certificate to legally collect this money from your customers. It’s free to apply and receive one from state and local governments.
The application will ask for some basic information about your business. For example, in New York they ask for your contact information, type of business entity, tax and bank information, license numbers and when you expect to start making taxable sales.
3. Calculate and Collect the Tax on Each Sale
Each time you make a sale, you should collect the appropriate amount of sales tax from the customer. You could calculate the amount manually, but if you make many transactions, consider using a POS system or sales tax software to process everything automatically. In addition, online shopping cart programs for your website typically calculate the sales taxes for you.
Make sure your receipt/invoice shows the amount going to sales tax so you and the customer can see. For better tracking, you may want to open a separate bank account to hold the taxes.
4. Watch Out for Sales Tax Holidays and Exemptions
Not all sales will be taxed during the year. Check with your revenue department to see whether any of their exemptions apply to your business. You should also see whether your state offers a sales tax holiday. If so, that could be a good marketing event for your business.
5. Send in Sales Taxes As Needed
When you apply for your small business sales tax certificate, the government will tell you how often to submit the taxes (monthly, quarterly, semi-annually or annually.) It depends on the state and your expected amount of sales. Make sure to send in your taxes according to the schedule.
6. Submit Your Sales Tax Return
Your state and local government will also ask you to send them a small business sales tax return to show you paid the right amount. They’ll tell you how often to file (monthly, quarterly, etc.). Even if you didn’t collect any tax but have a sales tax license, you still need to send in a return, so they can verify that you don’t owe anything. Not doing so could lead to a failure-to-file penalty.
Penalties for Mishandling Sales Taxes
While getting a small business sales tax system organized can be a hassle, it’s not something you want to skip. If you fail to submit the proper taxes, your state and/or local government could audit your business to determine how much you should have collected. They also could charge a penalty and interest on the unpaid amount.
With that being said, as mentioned earlier, state and local governments are providing various forms of relief to support business owners due to the COVID-19 pandemic.
In addition, for more sales tax support, you could hire a bookkeeper or accountant who specializes in this area. They can help register your business with the government, put together your system to calculate and collect taxes, and organize your first sales tax return. That way you can relax knowing your business has the right procedures in place.