Knowing how to pay sales tax to the state can quickly prove more complex than expected. Paying sales tax – the step that comes after collecting sales tax – is often a major source of frustration for many small businesses, especially since the often confusing world of sales tax regulations is constantly changing. And that’s just on the state level: Many cities and municipalities have their own rules for how to do sales tax.
You can probably already see how business sales tax can quickly become a headache for small business owners. With 45 of the 50 U.S. states establishing their own filing deadlines and record-keeping rules, each business’s process for collecting and paying sales tax may look different. Before diving in, get to know the basics of business sales tax using our guide.
What is sales tax?
A sales tax is a tax that a state or local government charges on several types of product and service sales. When it comes to sales tax, a small business is responsible for collecting tax, but notably, it is not directly financially accountable for paying sales tax. In other words, sales tax is an indirect tax that does not come out of your bank account – your small business will retrieve it from customers and then pay it to the government. If your small business has any presence in a municipality or state, you are responsible for collecting state and local taxes on many categories of products and services sold. You should note that five states do not collect sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
That last part is important. You may owe sales tax to both your state and local governments. New York City sales tax provides a perfect example: The 8.875 percent sales tax that shoppers pay there is actually the sum of a four percent state tax, 4.5 percent municipal tax rate, and a 0.375 percent public transit surcharge. In some places, the total sales tax rate is just that of the state. Take the example of Jersey City, New Jersey, which is right across the river from New York City. In that city, neither the municipality nor the county charges extra sales tax in addition to the state’s 6.63 percent rate.
Are there any sales tax exemptions?
In many states, you do not need to collect sales tax on groceries, clothes, industrial equipment, medicine, and medical tools. Since these rules may vary, be sure to check with your state and municipal tax authorities to be certain. Some transactions involving the sale of property may also be exempt from sales tax.
New retail stores in regions local governments have targeted for economic development may not need to submit the sales tax they collect from their customers. These stores can keep sales taxes as revenue if local legislation permits them to do so.
Additionally, in many states, you may not have to collect sales tax on goods sold to resellers. These resellers will provide you with documentation called a resale certificate, which exempts them from paying sales tax on their volume purchases. As with all rules for how to do sales tax, double-check with your state and local tax authorities to know for sure.
Depending on where you conduct business, with whom you conduct business, and the industry in which you operate, you may be exempt from other types of sales tax. Consult your state and local tax authorities for more information.
Five steps to start collecting sales tax
Now that you understand the basics of small business sales tax, you should be ready to begin collecting sales tax. Follow the below steps to learn how to pay sales tax for your small business.
1. Register for a sales tax permit
Your first step is to search for the sales tax permit registration page on your state’s taxation website (often the Department of Revenue). Through this page, you can register to collect, report, and pay, sales taxes both within and outside your state. Be sure to have your federal employer identification number (EIN) and other basic business contact and ownership information on hand.
2. Figure out what’s taxable and at what rate
Just as you must register for a sales tax permit, you must also determine your sales tax rate. Like in the New York City example, you may be responsible for charging several sales taxes. You may also be responsible for charging none at all, depending on where you live and the type of goods you sell. The appropriate state or municipal authorities can provide that information.
As mentioned earlier, not all products and services you sell will be taxable. While non-taxable items generally fall into the categories mentioned above, each state will have its own exceptions. Pennsylvania sales tax laws provide a useful example: there, pumpkins are non-taxable when sold as groceries, but taxable when sold as decorations.
3. Consider opening a bank account to set aside sales tax
Before collecting sales tax, you may want to open a new bank account solely for the tax money you collect. You aren’t legally required to open another bank account for this purpose, but doing so may streamline your ability to record, report, and pay your sales taxes.
4. Collect and keep record of all sales tax collected
After completing the previous three steps, you can start collecting sales tax. Be certain that you have programmed all point-of-sale systems with the necessary tax rates and are printing sales tax amounts on all receipts.
Additionally, you may want to consider whether or not you plan to (or have to) list sales tax as separate line items on receipts and invoices.
In almost every state that collects sales tax, you will need to track and record every instance of your business collecting sales tax. Be sure that the total monetary value of all taxable items sold in the transaction and the total sales tax collected are clearly indicated. Your tax authorities may also require you to hold onto receipts and other original sales documents – and when it comes time to report your sales tax, you’ll be happy you have these on hand.
5. Report and pay your sales tax collections
Your sales tax record keeping isn’t solely for internal purposes. You’ll also need to report your sales tax collections to your tax authorities on a regular basis (though reporting frequency varies by state). If you follow the above instructions for keeping detailed records of your sales tax collections, properly reporting your sales tax should be a piece of cake – check your tax authorities’ websites to determine their reporting process requirements.
When it comes time to pay the sales tax, you’ll submit a sales tax return along with the money you’ve collected from your customers. Note that reporting deadlines may differ from submission deadlines – again, check with your tax authorities to be sure. In most cases, sales tax submissions will be required quarterly, but for higher-earning businesses, monthly submissions may be mandatory.
What else should small businesses know about sales tax?
For the most part, all the above encompasses everything you should know when collecting sales tax for your small business. That said, you should always look into all possible variables connected to the below four considerations:
- Location: Look back on the aforementioned New York City and Jersey City taxes. In New York City, both the state and local governments collect taxes, but in Jersey City, only the state does. The key takeaway: Always check both.
- Resellers: Remember, when you sell your goods to a reseller, ask them to provide a resale certificate that allows them not to pay sales taxes on most goods.
- Record keeping: Collecting sales taxes is only half the battle. Keep thorough records so that, come tax submission time, you have everything you need to remain compliant with local and state sales tax regulations.
- Exemptions: Keep in mind that certain sales are exempt from sales tax collection. Know these situations in and out to avoid collecting extra sales tax – don’t do extra work you don’t need to, and certainly don’t inconvenience a customer with unnecessary charges.
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