Need info on sales tax in your state? Check out our Sales Tax Resources for Online Sellers in Every State.
Knowing if, when and how to collect sales tax can be, well, taxing! Because each state has different laws and rules surrounding sales tax, it can be confusing to know exactly what’s right for your business. Unfortunately, not knowing the law doesn’t always protect you if you neglect to collect tax, or remit sales tax the way you should. Your first line of business should be to check with your state or your accountant about all applicable sales tax rules, so you know the facts. Let’s look at some basic sales tax questions that may be helpful for your small business.
What is Sales Tax?
Sales tax is money charged on goods sold above the purchase price. Not all states have sales tax; however, those that do use the money for a variety of expenditures, like maintaining roads, schools and community works, among other things. When you go to the grocery store, the store charges you tax on the items you purchase. If a consumer comes to your online or physical store to purchase an item, he/she may also be required to pay tax on the item bought.
What Should I Do Before Charging Sales Tax?
Before you start charging sales tax, it’s important to make sure your business is set us as an actual business. Even if you plan to sell as a hobby, your state may require that you charge sales tax. So you’ll need to be prepared. Consider these things to get started:
- Set up your business: Decide how you will operate your business. This helps identify your business to the state when applying for a business license. Most home-based business operate as a sole proprietor, meaning there is no separation between your assets and those of your business. A limited liability company, or LLC is another good choice for small businesses who wish to separate personal assets from business assets.
- Doing Business As: If you operate as a sole proprietor and have a separate business name, i.e. your legal name is Jane Doe, but you call your business Doe’s Designs, you’ll need a DBA (doing business as) filing. This allows you to have a legal business name, but still operate as a single owner.
- Get the correct forms: You may need these things to start operating as a business: Employee identification number (EIN), business license and sales tax permit or seller’s permit. This varies by state, so be sure to check on all the proper paperwork you need to get started.
- Get a business bank account: A business bank account makes it easy to separate your business money from your personal money. When you collect sales tax, you can keep it in your business bank account until it’s time to remit it to the state. Be sure the account you use for holding sales tax is a dedicated account, meaning it doesn’t get used for anything else. This ensures you’ll always have the money you need to remit to the state.
- Get a business accountant: Your accountant is your best resource when it comes to collecting and filing business taxes. Though the paperwork to remit taxes to the state is relatively easy to do yourself, your accountant is invaluable if questions arise. Just be sure your accountant has experience working with small businesses and dealing with sales tax issues for your state.
- Ensure the product you are selling requires sales tax: Not every product requires sales tax. Other products, like food items, may be taxed at a different rate than other goods, like clothing. Products that don’t require sales tax will be listed as ‘exempt.’
- Learn your state’s tax rate, city and country rates: Some states have a complicated sales tax system. Tax rates may be different for certain counties or cities within the state. This means, if you live in Wyoming and sell to a customer in Wyoming, you will have to charge Wyoming sales tax, but may also need to adjust rates based on the customer’s county.
Who Should Charge Sales Tax?
One of the most common questions new small business owners ask is, “Should I charge sales tax?” Depending on your state laws, you’ll likely be required to collect sales tax anytime you sell, even if you only consider yourself a hobby-business.
- Online sellers: Online sellers are usually required to collect tax on sales made to customers in their own state. This applies if you have an Etsy shop, sell on Ebay, have your own website or sell on another online venue. If you live in Minnesota, you must collect taxes from online sales to customers who also live in Minnesota. As of now, you aren’t required to collect sales tax from buyers who live in a different state than you for online sales.
- Craft shows/trunk shows: If you sell products at craft shows, vendor fairs, farmer’s markets or trunk shows, or other in-person events in your state, you may be required to collect state sales tax on items sold. You would collect tax from all buyers, regardless of which state they live in, as they are buying from you, in-person, in your home state. Some states require that you have clearly marked information available at your booth about sales tax rates. Some seller’s have a highly visible card that says, ‘Sales tax of 5.5% is added to all purchases.’ Be sure to check with your state to see what customer documentation may be needed if you sell in-person.
- Wholesale: Your state may have separate laws governing products you sell at wholesale. Wholesale sales include selling in bulk and at a reduced rate (wholesale rate) to another business. For instance, if you sell 45 handmade necklaces to a retail store, at a wholesale price, you may pay a different sales tax rate on that sale.
How Do I Charge Sales Tax?
Charge tax is charged in addition to the price of the item you are selling. As a business owner, you can’t tell a customer that you’ll absorb the cost of the sales tax on a purchase, but you may include the price of sales tax in the price of an item. If you’re selling baby hats at a craft show and price them $15.99 including tax, be sure to have a notice posted that the purchase price includes tax. This helps prevent confusion or the possibility of double-taxing on sales.
For instance, in Wisconsin the sales tax rate is 5.5%. If we sell a baby hat for $15.99, we add 5.5% to the purchase price, or 0.88 cents, bringing the total to $16.87. We could also make the purchase price of the baby hat $16.90, which includes the 0.88 cent sales tax charge.
- Adding it to your shop: If you sell on Etsy or Ebay, you can set up sales tax rates right in your shop or store. Both of these venues offer the ability to enter multiple sales tax rates so you can adjust as needed for where and what you sell. When a customer from your home state makes a purchase, sales tax is automatically added to their total. If you have your own website, be sure your payment cart system is equipped to add sales tax to applicable orders.
- Adding it to show purchases: Your state website may have a handy sales tax chart that you can print out and take with you to shows. This is a clear outline of how much sales tax you should be charging for the current year. When making show sales, add sales tax on at the end of a purchase. Or, add the cost of sales tax into the purchase price. Be sure to indicate on the customer’s sales receipt, how much sales tax was charged. If you can’t get a sales tax chart, just be sure to keep a calculator handy to figuring total purchases with tax.
- Adding it to shipping: Some states require that you charge sales tax on shipping cost. While not common, be sure to find out if you’ll have to add a tax charge to the shipping cost for online orders.
- Paypal: If you accept Paypal payments, you can add sales tax via the Paypal checkout system. This is a good option of your website doesn’t have the ability to add sales tax at checkout.
How Do I Keep Track of Sales Tax?
Because you collect sales tax and hold the money until it’s time to pay the state, you need a good way to manage it. Having a separate business savings or checking account is a good idea. When you collect sales tax on an item sold, transfer the cost of the sales tax to your designated business account. You can also keep track of all sales requiring sales tax for later accounting purposes, if needed.
- Spreadsheet: Some small business owners choose to create an Excel spreadsheet to keep track of sales tax. You can create columns for the item sold, purchase amount, date and sales tax charged. You can keep a monthly spreadsheet, or quarterly, whichever is easier to manage.
- Accounting Software: In Outright.com, you can see your sales tax due in your Taxes -> Sales Tax Tab.
- Notebook: If you don’t mind the old fashioned way, good old pen and paper can do the trick. Keep an accounting notebook just for sales tax.
When keeping track of sales tax, remember to have separate records for different items sold, if they require a different tax rate. For instance, if you sell kitchen towels and homemade fudge, your state may require you charge a different sales tax rate for both the towels and the food items. At the end of the year, print out your sales tax totals for accounting purposes. The more organized your sales tax tracking system is, the easier it will be monthly, quarterly and when taxes are due and at the end of the year.
How Do I Remit Sales Tax?
You’re required to remit all sales tax that you collect, to your state. Some states like to receive payments monthly, some quarterly and some are annually. You’ll need to fill out your state’s sales tax payment form, which should be easy enough to complete on your own. If not, rely on your business accountant to help with any questions to make sure you fill it out properly.
You may be able to complete sales tax remittance forms and make a payment online. Or, you may use a check or debit card to send a payment, along with your completed form.
Uh-Oh. What if I Didn’t Charge Sales Tax?
If you’re new to selling online, you may not have realized that you needed to charge sales tax on certain items sold. Some sellers have a hard time differentiating between a hobby and a business, and if and when sales tax should be collected.
If you’ve been selling online or at shows without a seller’s permit or sales tax license, you need to get these ASAP. Speak with your business accountant immediately and let her know your error. Then, go back through all of your past sales in which you should have collected sales tax. Figure out which ones occurred in your home state, then figure out how much sales tax should have been collected on each.
If you sell online and didn’t make any sales to someone in your home state, you’re probably safe. However, if you do have uncollected sales tax, you’ll need to cough the cash up yourself. Some states also require a fee or penalty for doing business without the proper paperwork or sales tax collection. Be very clear with your business accountant so you can work together to fix your past mistakes and get squared away for the future.
Several states offer amnesty for overlooking sales tax collection for very new business. This means, you may be able to remit past, uncollected sales tax without a fine or penalty. Even if you are an established business, there may be a time when you forget to charge sales tax. Be sure to rectify it as soon as you realize the error.
Remember, if you’ve been selling without the proper clearance to collect sales tax, you probably overlooked filing income on your sales as well. Before you go any further with your business, ensure you have all the required legal paperwork you need from the state, and the federal government, to operate as a business.
What if I sell Out-of-State?
You may have the opportunity to sell your products out-of-state. If you attend a craft or vendor fair or exhibit at a trade show in another state, you’ll need to abide by that state’s sales tax laws. You may be required to collect sales tax on items sold in the host state.
If you’re attending a large or well-organized event, like a trade show, the exhibitor manager should be able to help you obtain all necessary seller paperwork for doing business in the host state. Besides a temporary sales tax permit, you may also need a seller’s permit to legally sell at the event. Be sure to find out all the laws regarding sales tax and selling before you attend the event.
Where to Get Help
Sometimes, you just need help! Dealing with the government can be scary, especially when you’re trying so hard not to break business laws or do anything wrong. There are several resources available to help you learn more about sales tax and applying it to your business:
- List of State Government Websites: Here is a list of state government websites across the United States. If you don’t find what you’re looking for here, try an online search using, ‘Texas’ and ‘sales tax law’ (simply replace ‘Texas’ with your own state). If your state government has resources available, you should be able to find them. Many state government websites have all necessary forms available online so you can fill them out, pay any required fees, and in some cases, instantly receive your seller’s permit, DBA or other licenses. Even if your state website doesn’t offer online access, it should list a phone number and/or contact person to reach for live help.
- Small Business Association: The Small Business Association is another great place to look around for help. Visit the SBA website to find a counselor who may be able to help you with questions you may have.
- SCORE: SCORE.org offers a wide variety of free small business mentoring and advice from people who know – because they are successful entrepreneurs, too! From choosing a business entity to sales tax and more, you may be able to find help here.
- Etsy’s Guide to Collecting Sales Tax: Etsy’s Tax Tips Guide offers information on getting started collecting sales tax. This is especially helpful no matter if you sell on Etsy a little, or a lot!
Ultimately, the more you know and the more you prepare, the easier maintaining sales tax will be. Before long, it will become less scary and second nature for your growing business.