Knowing how to pay sales tax for a small business can feel overwhelming, especially as states continue to update sales tax rules, economic nexus thresholds, and filing requirements.
By understanding the basics, avoiding common compliance pitfalls, and using reliable technology to automate the process, you can protect your small business while staying focused on growth.
Does my small business have to collect and remit sales tax?
Yes. If your business has a tax obligation in a state, you must collect and remit sales tax. The challenge is knowing when that obligation applies.
Below are some standard questions to determine whether sales tax applies to your 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 factors such as point of sale, product type, and more. To ensure you’re charging the correct rate, subscribe to Thomson Reuters ONESOURCE Fast Sales Tax, where you can look up sales and use tax rates by state, county, city, or zip code.
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 small businesses need 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 vary by state and consider physical presence, e-commerce, transaction thresholds, and other business-related activities that may qualify.
Is the product taxable? Whether a product is taxable varies by 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 whether 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 when you work as a wholesale dealer and sell 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. A limited liability company (LLC) isn’t exempt from collecting sales tax on products or other tangible personal property sold in the various jurisdictions where its 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 does sales tax work for a small business?
Sales tax is a pass-through tax collected from customers and remitted to the appropriate state or local tax authority. Businesses do not keep sales tax revenue; they hold it temporarily until filing and remittance deadlines.
In practice, this means calculating the correct rate, collecting tax at checkout, tracking liabilities, filing returns, and paying what you collected.
Is sales tax deductible for small businesses?
Sales tax that you collect from customers is not deductible; it’s not your income. However, the sales tax you pay on business purchases may be deductible in certain circumstances.
Generally, sales tax paid on deductible business expenses — for example, supplies and equipment — can be included in the expense itself. Always refer to IRS guidance or a tax professional for specifics.
What are some ways for small business owners to reduce tax liability?
Small businesses can reduce tax liability through deductions, credits, proper bookkeeping, and choosing the right entity structure. While sales tax itself isn't typically a major driver of federal tax liability, good compliance helps avoid penalties that increase costs.
Strategies include maximizing business deductions, leveraging available tax credits, investing in automation that reduces error-related penalties, and maintaining clean exemption documentation.
How do small businesses remit sales tax?
Once you've determined where you have obligations and have properly collected sales tax, the next step is remittance.
- Register with your state’s taxing authority. You must register before collecting any sales tax. After registering, you receive filing credentials and your required filing frequency.
- Track and document the sales tax you collect. Keep detailed invoices showing the tax collected for each transaction. States may require breakdowns by district, city, or county.
- File returns, even if you collected no sales tax. Many states require a “zero return” if you had no taxable sales during that filing period. Missing a return can lead to penalties or license revocation.
- Remit the sales tax you collected. States may offer online portals, automated uploads, or manual filing options. Filing frequency and deadlines vary based on your sales volume, such as monthly, quarterly, or annually.
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. Keeping current with sales tax legislative updates across states is challenging for many small business owners. 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. Navigating the rates required by each tax jurisdiction requires careful attention. 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 are 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.
- Managing exemption certificates. Failing to collect exemption certificates on exempt sales is a common problem. In most cases, requesting an exemption certificate immediately is the best course, but it adds extra work for both you and your customer. However, completed forms are 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 recurring concerns. 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 lets you look up sales tax rates, identify appropriate product taxability statuses, view due dates, and easily search sourcing rules, 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 sales tax solution helps you stay organized, save time, free up capital, and stay 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, current sales tax software 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.
