We get it. At TaxJar, we talk to online sellers every day who tell us all about their sales tax headaches. From figuring out what rate to charge each customer to dealing with complicated sales tax filing forms, it’s understandable that you want to push “sales tax” to number 39 on your huge to-do list.
That’s why I’ve written today’s post, to demystify sales tax and take some of the fear out of dealing with this ubiquitous administrative task. Once you’ve boiled sales tax down to these 5 steps, it seems much more manageable. Here goes:
1. Step 1: Determine where you have sales tax nexus
As an online seller, you are required to collect sales tax in states where you have “sales tax nexus.” Nexus is a fancy and legal way of saying “significant connection” to a state.
Forty-five U.S. states and Washington D.C. have a sales tax. And each state sets its own sales tax laws and rules. But the factors that create the nexus are similar in most states. They are:
A Place – an office (this includes working from home at the kitchen table), a store, a warehouse, a factory or other location
Personnel – an employee, salesperson, salesperson, contractor, installer or other person working in your business
Inventory – products stored for sale in an estate
A drop-shipping relationship – if you use a distributor to ship products to your customers, you may have a sales tax nexus.
An affiliated third party – if another company or individual ships sales to you in exchange for a share of the profits, it could create nexus for you in the state where you are located.
Temporary sales at a trade or craft show – selling items in a state – even temporarily.
Step 2: Register for a sales tax permit
When you have nexus in a state, the first step before making a sale is to register for a sales tax permit. States consider it illegal to collect sales tax without a permit, so don’t skip this step.
Each state’s sales tax permit registration process is a little different, but you can view guides on how to register for a sales tax permit in each state here.
When you receive your state sales tax permit, you will also be assigned a filing frequency and due dates. Generally, filing will be monthly, quarterly, or annually, depending on your sales volume (i.e., the higher your sales volume, the more often you will file).
3. Step 3: Collect sales tax from all purchasers.
Once you have obtained your sales tax permit, the next step is to make sure you are collecting sales tax from all buyers in your nexus states. If you sell through multiple channels, you must make sure you are collecting sales tax from all buyers in all states and in all channels.
Pago Ya ofrece un cálculo automático del impuesto sobre las ventas fácil y preciso para los vendedores en línea. Si vende en otros canales, asegúrese de configurar la recaudación del impuesto sobre las ventas allí también. Aquí hay una lista de guías sobre la configuración de la recaudación de impuestos sobre las ventas en muchos carros de la compra y mercados en línea populares.
Step 4: Report how much sales tax you have collected
Up to this point, sales tax has been fairly straightforward. It’s when you have to file a sales tax return with the state that the real fun begins.
Some states are simple. They have one statewide sales tax rate and that makes it fairly easy to report how much sales tax you’ve collected. But the vast majority of states have many sales tax rates. In addition, they require online sellers to collect sales tax based on the buyer’s shipping address. This means that, as an online seller, you may have collected sales tax in dozens or hundreds of different tax jurisdictions. When you go to fill out your sales tax return, the state requires you to indicate how much sales tax you have collected not only from buyers in the state, but from each county, city and other special taxing jurisdiction. ouch!
That’s where TaxJar Reports comes in. TaxJar Reports connects to Checkout Now and the other channels you sell on and breaks down the sales tax you’ve collected from all your buyers (across all your channels) in the exact format the state wants to see. From there, it’s easy to fill out sales tax forms.
Step 5: File a Sales Tax Return
Once you’ve calculated how much sales tax you’ve collected in each state, city and special tax district, it’s time to file your sales tax returns.
Most states allow you to file online (some even require it), and pay by check or online with an ACH transfer from your bank account. All states have penalties for paying late, so be sure to pay on or before the deadline.
More than half of the states are aware that collecting and reporting sales tax burdens online sellers and offer a small sales tax discount to sellers. This means you keep 1-2% of the sales tax you have collected from customers. Check out this list of states that offer a sales tax discount and don’t leave money on the table.
Also, always file a sales tax return, even if you have not collected any sales tax during the tax period. The states want all registered online sellers to file a sales tax return every due date. Failure to do so can result in anything from a $50 fine to revocation of your sales tax permit. Ouch.
If you want to get sales tax off your back, TaxJar AutoFile will file your sales tax returns for you. We even take your sales tax breaks into account so you save every penny you can.
And with that, your sales tax returns are filed! Now it’s time to get back to doing more profitable things until your next sales tax filing date arrives.
Have questions or comments about sales tax? You can read much more in our Sales Tax 101 Guide for Online Sellers. Or start the conversation in the Sales Tax Facebook Group for E-Commerce Sellers.
TaxJar is a service that simplifies sales tax reporting for over 5,000 online sellers. Try TaxJar today for free for 30 days and take the headaches out of sales tax compliance.