State and local governments collect sales tax on the sale of goods and services. Your business’s location and the nature of the products or services you sell determine the amount of sales tax you collect. However, not all products and services are subject to sales tax. Common exceptions include food, clothing, medicine, newspapers, and utilities, and these exceptions vary from state to state.
This article will guide you through the process of calculating sales tax for your business and offer tips to avoid common mistakes.
Nexus represents the connection between your business and a state or jurisdiction that requires you to collect sales tax. There are three main types of nexus, namely:v
This is the most common type of nexus and is established when you have a physical presence in a state, such as a store, office, or warehouse.
Economic nexus is established when your business reaches a specific sales or transaction threshold in a state, even without a physical presence. The threshold varies from state to state.
Although less common than physical presence or economic nexus, click-through nexus is formed when your business directs customers in a state to a website that sells taxable goods or services, even if you lack a physical presence.
You can determine if your business has nexus in a particular state by contacting the state’s Department of Revenue or Taxation.
Once you identify your nexus, you need to determine the applicable sales tax rates in those jurisdictions. State governments set sales tax rates and rules, but local governments may also have their own.
You can find the sales tax rates for your state and local governments by visiting their respective Department of Revenue or Taxation websites. You can also use a sales tax calculator to determine the amount of sales tax you owe.
Common taxable items include:
Common exempt items include:
Local governments create special taxing districts to fund specific projects or services. Businesses operating within these districts may need to collect additional sales tax on top of the regular state and local sales taxes. Contact your local tax authority to determine if your business is subject to a special taxing district.
Note: A tax professional or accountant familiar with your state’s sales tax laws can help you determine the taxability of specific items in your business and ensure correct collection and remittance of sales tax.
Combine Rates: Add the state, county, city, and any special district tax rates to get the total sales tax rate for your location.
For example, if the state tax rate is 6%, the county rate is 1%, the city rate is 1.5%, and there’s a special district rate of 0.5%, the total sales tax rate would be 9%.
Apply the Rate to Sales: When you make a sale, multiply the total sales amount by the calculated sales tax rate to determine the amount of sales tax to collect from your customer.
Note: Sales tax rates may change due to legislative updates, so regularly check for updates from the relevant tax authorities. If your business operates in multiple locations, repeat this process for each jurisdiction where you have nexus.
Most states allow businesses to file their sales tax returns through online portals. When filing, create an account, enter your business information (including your sales tax registration number), and input your sales data for the reporting period. The portal will calculate the sales tax you owe and allow you to submit your return.
If you owe sales tax, make a payment along with your return using electronic funds transfer (EFT), credit card, or check. Most states offer online payment options through their portals.
Late Filings and Penalties: Businesses that fail to file sales tax returns by the due date may incur penalties and interest charges. These penalties can accumulate over time, so adhere to the filing schedule. If unable to file on time, reach out to local tax authorities to discuss your situation and potential options.
Record Keeping: Maintain accurate records of all sales, transactions, and sales tax collections. These records will serve as documentation in case of audits or inquiries from tax authorities. Keep records organized and easily accessible for reference.