So, you are looking to start an online store in the US or just started one but still not sure what sales taxes are and why you should care about them?
Read on to understand what they are and why it’s important for you to take it seriously.
Since 2018, ecommerce stores in the US have been required to collect sales tax for every purchase made on their online stores. Store owners are then required to file the collected taxes to respective states and/or local governments.
Here’s a quick guide covering all you need to know about sales taxes, collecting and filing sales tax.
What is Sales Tax?
Sales tax is an amount of money (calculated as a percentage) that is added to the cost of a product or service at the point of purchase by a consumer, this sale can happen at physical or online stores. Sales taxes are paid by the buyer, collected by the seller and remitted to the government for public use.
The exact sales tax amount to be charged is determined by the state (in some cases city) the buyer resides. Since sales tax rates are determined by the state governments and not the federal government, you would find there are different rates for different states. In total only 45 (plus Washington DC) out of the 50 states in the US collect sales tax.
The 5 states that do not charge state sales tax on purchases include:
- New Hampshire
*Both Alaska and Montana allow local municipalities to charge sales tax
Why pay Sales Tax?
Governments use sales tax to build and manage public infrastructure such as roads, fire stations, public libraries and even street sweeping.
As a business, you are obligated to collect sales taxes in states and cities in which you have “nexus”, for online businesses this means that you only collect sales tax from buyers in states or cities where you have reached the requirements for a nexus. For example, you become required to collect sales taxes in South Dakota when you make more than $100,000 in sales annually or have more than 200 transactions in the previous or current calendar year.
Once you find your business has reached or exceeded one of the above criteria for South Dakota, then you need to apply to the state tax department for a sales permit, only then can you collect and remit taxes to the state and avoid tax evasion and the consequences that come with it.
Each state has different conditions for meeting their sales tax nexus, click here to read all the conditions for meeting sales tax nexus in every state.
What Products do I collect sales tax for?
Products and services subject to sales tax vary by state. In some states, groceries and prescriptions are exempted, while in some others clothing is exempted from sales tax. Other types of goods that are not subject to sales tax include:
- Items purchased for resale to consumers. People who buy items from you with the intention to resell them aren’t required to pay sales tax. The assumption is that the final consumer of the item will pay the sales tax when they purchase it.
- Items purchased as raw materials. Products purchased to be used as components of a handmade or manufactured product are not subject to sales tax.
- Items purchased by a nonprofit. Nonprofit organizations are exempted from paying sales tax.
To better understand which products to collect tax for or not and to know what to when you are charged sales tax when you sell ineligible products click here
How to collect Sales Tax
In order to collect sales tax from buyers, businesses have to apply for a sales tax permit from the state’s department of taxation. Applications typically take about 2 weeks to complete and can be done online and in person. Some states provide permits for free, while others charge a fee. Click here to see a list of the state taxation departments.
How to remit Collected Sales Tax
Businesses owners must file every sales tax collected within a period specified by the state, usually every month or quarter. Failing to remit sales tax payments accurately and on time can result in large penalties.
Frankly sales taxes can be both overwhelming and intimidating for new and experienced entrepreneurs. First off there are different rates for different states, different payment deadlines and then you have to ensure to keep track of when you reach the threshold to qualify to collect sales tax for the different states you sell to.
Imagine doing all of these while still having a business to run, products to manufacture or source, customers to attend to and then your personal life to manage, I can imagine it’s a little of work.
What if there was a system that helps you automate the entire process of collecting and filing your sales tax on your website. This system helps you automatically calculate the accurate sales tax rate to use based on the state the buyer is residing, adds it to the cost of the product at checkout, and also automatically reports and pays the collected tax to the respective state before deadlines reach.
That system is AtomicTax and now you have a chance to be among the first people to use Atomickit when it launches in the US. Sign up here to be join the waitlist
Now you can meet your legal obligation of paying sales tax without losing your mind or hiring an expensive in house tax consultant for only a small monthly fee