There are many taxes that your company will be responsible for paying—both at a state and federal level. A common tax many small businesses are responsible for is sales tax. While it may seem straightforward to figure out when you owe sales tax and on what sales, the truth is that sales tax can be quite complex since its rate and application differs from state to state and product to product. A Priori tax lawyer can help you ascertain whether you owe sales tax and where and ensure you are in compliance with all relevant laws.
What Is Sales Tax?
Most states require certain goods and services to be taxed under a state sales tax regime, and certain goods, most notably gas and cigarettes, are subject to federal sales tax. In fact, only Oregon, Alaska, New Hampshire, Delaware, Hawaii and Montana don’t have state sales tax.
Sales Tax Nexus
Because sales tax in the U.S. is determined at the state level, only businesses with a physical presence in the state, called a nexus, can be compelled to register or to collect sales tax. For the purpose of sales tax, a nexus could be
- An office, store, warehouse, shipping hub, or other business facility is located in the state;
- Property owned or leased in the state;
- The physical entry of the owner, employees, or contractors into the state to take orders, perform services, or conduct other business activities; or
- Personal property used by the company on a more than occasional basis for business purposes.
Basically all in-person sales or provision of services will constitute a nexus for sales tax purposes. The exact definition of a nexus varies from state to state, so if you are not sure if your presence in a state counts, it may be a good idea to consult a local tax attorney.
Online Sales Tax Obligations
Now that online sales have become increasingly popular, not all companies actually have a nexus in the states where they can sell their products. This means that some online sales will be exempt from sales tax. Generally speaking, you are only required to pay a state sales tax where you have a presence. When customers ship to an address where you don’t have a nexus, generally no sales tax is owed whatsoever.
That said, tax laws for e-commerce are still evolving. Some states have enacted so-called Amazon laws that require the larger Internet retailers with no physical presence to collect and pay their state sales tax regardless. In additional, bills are currently being debated in Congress to standardize internet sales tax rules.
Even when selling products that are typically subject to sales tax, there are certain exemptions. These will differ from state to state, but typically, the following sales are exempt from sales tax:
- Casual Sales. If you occasionally hold a garage sale or an estate sale, these typically don’t subject you to sales tax. This exemption will rarely qualify for sales that are typical of your company.
- Resold Items. Retailers and resellers generally don’t pay sales tax on wholesale purchases. Only the end consumer will pays sales tax on these items at the point of purchase.
- Raw Materials. Raw materials sold to be used to manufacture other goods are not taxed.
- Goods for Non-Profits. If your business is selling to a registered non-profit, no sales tax is generally required.
Depending on your needs, the cost of hiring a lawyer who can help you assess whether you are subject to sales tax or handle an audit can vary. When you hire a lawyer through the Priori network, prices tend to range from $185 to $450 per hour. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
When is sales tax due?
It depends on the state, but most sales tax bills are due monthly or quarterly. Make sure to check the required filing dates in the states where you operate and file accordingly.
Can I count on my accounting software to calculate the sales tax I owe?
These are helpful tools to track and calculate sales tax, but they can make mistakes. Be sure to regularly audit the reports given by your accounting or shopping cart tools, and keep your own records of sales as well.
What is considered selling a service?
Many people selling a service do not know if they owe sales tax, because they are unsure of exactly what constitutes selling a service. Generally, sales tax applies to services when there is a tangible output and the service is incidental. For example, installation of a new sound system often requires sales tax, because the point of the service is to receive a tangible good. On the other hand, dentists in most states don’t owe sales tax on the fillings they give patients, because the service of tooth care is the main goal. Exactly which services are subject to sales tax, however, varies greatly from state to state. Some states, including Hawaii, New Mexico, and South Dakota, tax all services from cleaning to artistic performances and everything in between. Others tax very few. If you are not sure whether or not you owe sales tax for a specific service in your state, it is generally best to consult a tax professional.