Nobody started a business thinking “Hooray! I can’t wait to figure out sales tax!”
But, just like accepting payments or paying quarterly estimated taxes, sales tax is one of those administrative hassles that product sellers can’t avoid. The whole sales tax thing can get complicated, especially since every state’s sales tax rules are slightly different, so this post debunks some misconceptions and helps you ensure you’re on the right track with sales tax.
Here are the 10 things you might not get right about sales tax:
1. You don’t collect sales tax
There’s no business owner’s manual out there, so at first you may not be aware that you are required to collect sales tax. Another common myth we hear is “I sell online, so I don’t need to collect sales tax.” The truth is, if you sell taxable products (whether online, at a brick-and-mortar store, or at a craft-fair booth), you are required to collect sales tax from your customers.
You can check out this Sales Tax 101 for Square Sellers guide to help you determine when and if you are required to charge sales tax.
2. You collect sales tax without a permit
Before you start collecting sales tax, you should always apply for a sales tax permit. Most states consider it unlawful to collect sales tax from your buyers without a permit in hand.
3. You don’t know your nexus
In sales tax terms, “nexus” is just a fancy way of saying a “significant presence” in a state. You always have sales tax nexus in your home state, but other business activities — like having an employee, warehouse, inventory, salesperson, affiliate, etc. — in another state may also create nexus.
In the U.S., you are only required to collect sales tax from buyers in states where you have sales tax nexus. You can check here for a whole lot more about nexus and where you might have it.
4. You collect the wrong amount of sales tax
As a buyer, you may notice you pay six percent sales tax in one town and eight percent sales tax in another town. This is because, in most states, both states and individual local areas (counties, cities, etc.) have a sales tax rate. When you charge sales tax, make sure you are charging the total combined sales tax rate for your area. You can find individual sales tax rates with this sales tax calculator.
5. You charge (or don’t charge) sales tax on the wrong products
In many states, items considered “necessities” follow different sales tax rules. For example, in Pennsylvania, clothing isn’t taxable. In Illinois, grocery items are taxed at a reduced rate as compared to other items. Be sure you’re charging the right amount of sales tax on all your products. Some may be taxed differently.
6. You don’t collect sales tax through all your channels
Mo’ channels, mo’ problems. When you introduce a new sales channel into your business — maybe you’ve started selling on Amazon FBA or through Facebook — be sure to remember to also charge sales tax to any buyers on that platform. (Remember, you only need to charge sales tax to buyers in states where you have sales tax nexus.)
7. You file and pay late.
Sales tax due dates aren’t uniform. While most states want to hear from you on the 20th day of the month after the taxable period ends, others want to hear from you on the last day of the month, or the 15th, or the 23rd — you get the picture.
You may also only have to file quarterly, or once per year. It can be easy to forget that you have a filing due. Sadly, most states charge you a penalty if you file late, so be sure to keep track of those zany all-over-the-place sales tax due dates.
8. You don’t file “zero returns”
States require that you file a sales tax return even if you didn’t make any sales over the taxable period. States consider zero returns to be a “check in” so they know you’re still in business. Penalties for failing to file (even when you don’t owe a penny) can include everything from a $50 fine to having your sales tax permit revoked. Ouch!
9. You don’t take sales tax discounts
About half the states with a sales tax realize that they are asking you to take on a bit of a headache when they require you to collect and file sales tax. These kind states offer a sales tax discount. While the discount is generally only one to three percent of the sales tax you collected, it’s totally free money so don’t forget to take it.
10. You spend way too much time dealing with sales tax
Sales tax is complex and there are a lot of ways to get it wrong. But it doesn’t have to be that way. A sales tax automation solution can keep track of due dates, double-check that you’re collecting the right amount, and even file and pay for you. If you’re spending too much time hassling with sales tax returns, let technology do the hard work.
TaxJar is a service that makes sales tax reporting and filing simple for more than 8,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life.