Going National? What You Need to Know About Sales Tax
This is a guest post by Noel Hamm of SalesTaxDataLINK in Bentonville, AR.
If you sell your products to a retailer, and they’re planning to stock those products in their store and resell them to their customers, sales tax doesn’t have to be collected. When you sell products to consumers, you have to collect sales tax. Then you must file your sales taxes much the way you file income taxes. This isn’t so complicated when you’re in one location, selling to people in your own city and state. When you take your company national, things get more complicated.
Do you have to collect sales tax?
A lot of people believe that there are no sales taxes on products that are sold online. This isn’t true. The seller in these cases isn’t always required to collect sales tax, but the buyer is always required to pay it. Consumers are supposed to calculate the taxes and pay them directly as a use tax. In practice, unless they’re buying an airplane or another item of that size, most people ignore this rule.
This fact has led to a lot of controversy. Many states are trying to force online sellers to collect sales tax. In most states, though, the rule right now is that you only have to collect sales tax if you have a physical presence in the state where you’re selling. If your company has a physical store in that state, an office, or a warehouse, then you have to collect sales tax. If one of your workers lives in that state or you have salesmen with that state as a regular territory, that’s also considered having a physical presence in the state. If your company owns any property in the state, you must collect taxes. If not, then it is up to the consumer to take responsibility for the taxes. (Read more in Nexus and Internet Sales Tax.)
Are your products taxable?
Sales tax rules vary considerably from one state to another. Food products especially can get complex. The presence of certain ingredients, such as flour, can make things taxable or nontaxable. Different packaging can make the difference. For example, in New York, a two pack of Twix is considered candy and is taxable, while a six pack is considered groceries and is not taxable. A medication for people may be taxable while the same medication packaged for veterinary use may be untaxable.
There’s no way to predict what will be taxable and what will not; you’ll have to check the laws applying to your product each time you enter a new jurisdiction.
What are the tax rates?
Tax rates are different from one jurisdiction to another. A jurisdiction can be a state, but it can also be a city or a county. Again, this is not predictable. You just have to find out what the tax rates are when you start selling your products in a new jurisdiction. You are responsible, in cases in which you have to collect sales tax, for collecting the right amount.
If you collect 6% when you should have collected 8%, you will have to make up the difference yourself when you file your sales taxes. Some POS software, including e-commerce solutions, will calculate the correct tax based on the shipping destination. Sales tax filing software should catch any variances between what you should have collected and what you actually collected (check before you invest in this type of software and make sure that the product you choose does this).
How do you file?
Many states now require you to file electronically, and all states allow it. It isn’t difficult to do, but it is time consuming. You may have to file annually, quarterly, or monthly sales tax returns. Once you are registered for sales tax in a state, you may be required to file on a regular basis even if you had no sales in that state during the filing period.
Often these requirements are based on how much sales tax you pay. In Texas, for example, companies that paid less than $50,000 in sales taxes in the preceding year are allowed to file a paper report as long as they have fewer than 30 different jurisdictions to report. Each state will have its own rules.
Again, there is software available to automate much of the process.
Sales tax can be confusing and time consuming when you are selling products in multiple tax jurisdictions. However, failing to collect or file can lead to audits and penalties. When you plan to extend your company’s reach, include sales tax issues in your plans.