Mar 27, 2021Determining Sales Tax Liability for Your Business
Sales tax can be an overwhelming topic for startups. Each state has different laws associated with sales tax and is accompanied by numerous exceptions. However, much of the complexity lies around whether or not a company actually needs to pay sales tax. If you’re liable for sales tax and fail to pay the appropriate amount, you’ll incur major penalties from the IRS. This article will review what you need to know about sales tax to avoid potential risk.
Who sets the sales tax rate?
The United States has no federal sales tax law, so each state sets its own rates. Forty-five U.S. States collect sales tax, and sales tax is collected in 38 states. Just as states vary in the amount they charge for sales tax, they also vary in the way they collect the tax. The root of sales tax complexity lies in the states’ ability to charge varied rates in varied ways. Staying compliant requires an in-depth understanding of state sales tax law.
Which state do I pay sales tax in?
Nexus is a term to denote connection to a state. If your business has physical locations in Arizona and Texas, then it also has nexus in those states. Note that even if you don’t have a physical presence in a state, you could still have nexus there. Here are some other potential nexus qualifiers:
- Temporary sales
- Significant volume of online purchases
Not only are you liable for states in which you have nexus, but you are also liable for collecting sales tax across all channels in that particular state. For example, if you sell through an e-commerce platform, Amazon, social media, and a brick and mortar store, you’ll need to collect sales tax from each channel.
When am I liable?
If you sell taxable products, you are liable for sales tax. This applies in any state. Some states also require sales tax on services provided, so check your individual state law to find out.
In order to charge sales tax for goods and services, you’ll need a sales tax permit from the state in which you have nexus. After you receive a permit, you’ll receive an associated schedule dictating when to file sales tax (can be monthly, quarterly, or annually). The filing frequency usually corresponds with your sales volume. The higher the sales volume, the more likely it is that you will be asked to file every month.
At the end of the day, businesses themselves are liable for applicable sales tax. Since most individuals are accustomed to paying sales tax as a consumer, this distinction of liability is often misunderstood. Any and all sales tax liability falls upon the business.
How do I stay compliant?
Staying compliant with sales tax is a daunting task. First, always be analyzing nexus and risk in each state. Ask yourself if any new channels have opened up in a particular state.
Be proactive about filing state registrations. If you may begin business in a new state, apply for the approval to collect sales tax from consumers.
Calculate sales tax in each qualifying state. By checking your calculations against the requirements of the state, you can be sure that your business falls in line with the requirements.
Perform regular risk assessments. Each business is at risk of infringing sales tax law, regardless of where and to what extent they do business. By being conscious of your company’s standing in each state, you can mitigate this risk and retain control over the sales tax portion of your operations.
Since sales tax is an immensely complex topic, many companies outsource these services. While this can be performed in-house, outsourcing can lift a major administrative burden off of your shoulders.