How to pay sales tax for your small business
Knowing how to pay taxes for a small business is complicated and, with the continually changing world of sales tax regulations, can quickly lead to a headache.
Understanding the basic rules of sales tax, avoiding some common stumbling blocks, and finding a comprehensive tax solution to help you move forward, will bring continued success and growth, no matter your industry.
Does my small business have to collect and remit sales tax?
Small business owners are required to charge and collect sales tax in certain situations. Knowing when and how to charge can be one of the most confusing aspects of running a small business.
Here are some standard questions about determining how to charge and remit taxes for a small business:
- When do you charge sales tax? Forty-five states and countless localities require the collection of sales tax. Each state or locality offers various exemptions, depending on many factors including point of sale, type of product, and more. Check whether your state or local jurisdiction requires you to get a license to sell or a sales tax permit. Make sure you are charging an accurate local rate with all applicable rates for your specific location in addition to the state and any specialty rates
- Do you have nexus? Sales tax nexus is the business connection between a seller and a state. On its face, nexus is seemingly simple – if you sell products in a state, you must remit sales tax. However, the thresholds that trigger a nexus obligation can be nuanced, and it’s important for small businesses to understand their obligations before they experience growth. The first step is to determine if your business has nexus in states where you do business. Nexus requirements are different for every state and consider physical presence, economic nexus, transaction thresholds, and other types of business-related activities that may qualify.
- Is the product taxable? Whether a product is taxable will vary based on the jurisdiction and the type of product being sold. Factors include whether your state collects sales taxes based on origin or destination, whether you’re selling a product or a service, and if your state requires that the product or service be taxed.
- Are the goods sold for resale? If so, your customer will need to provide a valid resale certificate. A resale certificate is a signed document that indicates your customer’s plan to resell the goods or products you’ve sold them. Usually, this comes into play if you work as a wholesale dealer and are selling to retailers. However, manufacturing and construction industries also generally require resale certificates if the supplies are used in a product that is built and ultimately sold. Most states provide helpful resale certificate information on their Department of Revenue websites.
- Does an LLC have to pay sales tax? Yes. An LLC isn’t exempt from collecting sales tax on products or other tangible personal properties sold in the various jurisdictions where their businesses currently operate. Even if you operate an LLC, all items listed above should be taken into consideration when determining whether sales tax should be collected.
How do small businesses remit sales tax?
Knowing when and how to charge for sales tax is critical for small business owners. However, paying – or remitting – sales tax to the state or local government is equally important.
- Start by determining whether you have a compliance obligation in a state. If so, register with your state’s taxing agency before collecting any sales tax. After you’ve gone through the state’s registration process, you are then permitted to collect sales tax on your transactions.
- Once you’ve begun collecting tax, you’ll need to document the sales tax collected on an invoice, and it will need to be filed with the associated tax jurisdiction based on the sales tax due date and filing frequency set by each state. These can differ from state-to-state and can range from the middle to the end of each month, unless you qualify for a reduced filing frequency.
- In some instances, a sales tax return will need to be filed even though your business did not collect sales tax during a specific filing period. Even if your business wasn’t active during a period, most states will require a return. Failing to do so can result in a minor financial penalty, but in some cases can result in having your sales tax license revoked.
- Once you’ve aggregated your sales tax based on the requirements for each return, you are ready to file your sales tax return. How you remit your tax will be different depending on the state. While some have simple filing options, which means merely figuring out how much sales tax you collected from buyers in that state, others will require you to break down the tax you collected by other geographical areas such as city and county.
What are some common compliance pitfalls for small businesses?
Managing your tax obligations isn’t easy and non-compliance – unintentional or not – can result in serious consequences for your business. Knowing (and avoiding) some common compliance pitfalls ensures that you won’t be surprised by an unexpected sales tax obligation.
- Falling behind. Falling behind on sales tax legislative updates in various states is a concern for many small business owners. And if you’re doing business in multiple states, it can be a monumental task to make sure you know about and understand tax legislation when it gets passed.
- Breaking down rates. Inability to break down rates required by a tax jurisdiction can also be an issue. Sales tax rates include the state rate, plus any local or other taxing jurisdiction at the point (or destination) of sale. Knowing how to navigate the increasingly dense tax rates, and the ability to track and ensure compliance across your business, is critical to success.
- Understanding nexus. Neglecting to collect tax where you have nexus will quickly become a problem. The first step is understanding and identifying where and when you have a nexus and how that will affect the amount of tax you must remit to the individual state.
- Exemption certificates. Failing to collect exemption certificates on exempt sales is a common problem. In most cases, asking for an exemption certificate immediately is the best course. But it does cause extra work for both you and your customer. However, having the completed forms is necessary and expected during an audit.
How do I manage sales tax questions successfully?
Most sales tax questions and issues aren’t one-time problems. The most common pain points for small business owners are concerns that come up again and again. While you can’t avoid paying sales tax, you can find a comprehensive solution that makes how you deal with taxes smarter and more efficient.
- Save time. When all your information is in one place, it saves you valuable time. A comprehensive sales tax solution allows you to look up sales tax rates, identify appropriate product taxability statuses, get due dates, and search sourcing rules easily, putting all your sales tax answers in one place.
- Stay organized. Gone are the days of managing multiple stacks of paper, hoping you remembered to file the one you need in the exact moment you need it. A comprehensive tax solution helps you stay organized, save time, free up capital, and keep ahead of upcoming legislative changes without risk to your business.
- Lower risk. You want to see a problem before it becomes a problem. Having industry leading, up-to-date information at your fingertips is critical to success. The ability to access step-by-step tax guidance, automated compliance, and exemption forms in a single space allows you to work confidently while minimizing risk.
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