The Ultimate Guide to Sales Tax for Small Businesses by Jeff Johnston

The Ultimate Guide to Sales Tax for Small Businesses

As a business owner in a state that imposes sales taxes, you have an obligation to collect and report sales tax.

by Jeff Johnston
updated September 03, 2021 ·  3min read

Nearly every consumer is familiar with sales taxes because 45 states and the District of Columbia require business owners to collect it at the point of sale. As a business owner, you have a different relationship with sales tax, but it's equally important to understand and meet your obligations.

woman working cash register

 

Business Owner Concerns

As a business owner selling goods or services you must collect a sales tax on each taxable sale. However, the money is not yours. Instead, you must periodically remit the tax to the state—usually quarterly, monthly, or weekly, depending on your sales volume. The higher your sales, the more frequently you're required to remit the sales taxes.

The total sales tax rate is typically a combination of two rates—the state tax rate and a local rate. Rates vary by state and even by location within each state. Combined rates are as low as 1.76 percent and as high as 9.53 percent. Your CPA or attorney can help you determine the exact percentage applicable to your location.

When You Start Your Business

A new business owner's sales tax obligations begin with registering with the state where the taxable goods or services will be sold. Once registered, you will receive a sales tax permit, which allows you to do business in the state.

What Does the Tax Apply to?

What is taxed or not taxed depends on the state where you are conducting business. Usually, the tax applies to consumer goods and services. However, some goods and services are not taxed. States typically exempt necessary items such as clothing and groceries. For specifics, check with your CPA, attorney, or your state's tax authorities.

The Importance of Record Keeping

Sellers must keep records of all sales, even nontaxable sales. It depends on the state, but typically business owners must keep sales tax records for at least five years. Your attorney or CPA can advise you on the exact requirements in your state. It will be important to have these records because if you are ever subject to a sales tax audit, these records will be the first thing the auditors will request.

How Online Sales Are Taxed

For a long time, sales across state lines were not subject to sales tax. Instead, purchasers were supposed to report the sale to the state and pay a use tax. As you can imagine, that rarely happened for all but very large purchases such as private jets. This was not a big issue before the internet. However, with the growth of online shopping, the number of sales across state lines increased enough that states were losing significant amounts of sales tax revenue.

This issue was recently resolved by a Supreme Court decision that allowed states to require out-of-state sellers to collect and remit sales taxes.

Even though states can require all sellers to collect and remit sales taxes, many states only require it if the out-of-state seller's sales exceed a preset, annual amount. It's typically a large amount (e.g. $500,000).

Note, if you sell online using a third-party retail website, check the website to see if it provides back-end functionality that will correctly collect and remit sales taxes on your behalf.

Steps To Take To Start Collecting Sales Taxes

If you've started a business, here are some steps you can take to make sure you are complying with your state's sales tax laws:

  • Check to see if what you sell is subject to sales tax
  • If you will be selling goods or services subject to sales taxes, then obtain a sales tax permit by applying for one through your state's registration process
  • Meet with your accountant or attorney to make sure you have the proper recordkeeping systems in place.
  • If you sell online, make sure your online sales app is configured to correctly collect and remit sales taxes for each state where you make a sale.
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Jeff Johnston

About the Author

Jeff Johnston

Jeff Johnston has been an attorney and CPA in Texas for over 25 years. Areas of legal practice included tax and closely-… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.