How sales tax work and why it’s there
If you buy products or services then you probably know about sales tax and you’re thinking it’s just around to add pain, but it isn’t. There are 50 states in the US, and only 45 and the District of Columbia collect sales tax. The taxes that you pay for are used for the salaries of employees, public resource improvement, police, fire departments and even road improvements just with that and you can see that it was collected for a cause, for the betterment of the public. When you shop in brick and mortar shops, you usually have to pay a little more per item for the taxes. Soon, in more places you will have to do that online too, the charging of sales tax online is changing and evolving.
The sales tax would depend more on if the state where you’re on has it or not. Let’s say you’re in Montana and you sell to your customer in Montana, you won’t have to worry about sales tax. But what if you’re in a state without tax but you’re sending to a state with tax, how will things be? This is where Nexus comes in.
What is “nexus”?
Nexus is a more classy way of naming or referring to the place where your business operates. So basically if the state where your business operates has a sales tax, if you have a nexus in the state that you’re operating then you have to collect sales tax. So Back to our example, if you were from Montana and you’re transacting with someone in Florida, Florida has a sales tax but if you don’t have nexus there, you still don’t have to pay. But when do you have a nexus and when do you not? The question “When should I charge tax? Is already difficult to answer as it is, and making sure you know all the places where you have nexus could add up to the difficulty. The thing is, you have nexus no matter what in the state where your business is based, but you could have nexus in other places as well. It’s more of the places where you have a warehouse, a tradeshow presence even if it’s just occasionally, and if you have a drop shipping relationship in that area. The definition of nexus varies from the state so it’ll be best to find out the details instead of assuming.Below is a photo of US sales tax by states:
Sales tax permit registration
Before you even begin collecting sales tax if you’re transacting in places that you have nexus, you have to make sure you have a sales tax permit. You can secure that in your state’s Department of Revenue office or if you want to do it online you can check their website. Other sales tax permit has a fee, but most of them are actually free. When it comes to paying, when you’ve secured a permit, they’ll let you know when you have to pay and how often you’d have to. Most of the time it’s annually or quarterly but for some, it’s monthly. For annual dates, January is sometimes the busiest time of the month because that’s when the majority is scheduled to pay.
Calculate how much sales tax you’ve collected
It’s important to set a date near to the due date of tax filing for computing how much tax you’ve collected from your buyers from states that have nexus. You don’t have to worry so much if you’re using Shopify Pro or Unli because they have a tool to run your sales tax report. But if you accept payment from other platforms or if you have different channels then it could get more complicated. But there's multiple software available to help you make it a bit easier. By the time you're finished computing the tax you’ve collected, you’re ready for the next step. Basically, it’s more like they just want you to show up and see if your business is still running.
File your sales tax return
This time make sure to check if your state requires you to file online because some states would charge you a penalty if you don’t. But what if there wasn’t any tax to collect? You think you’re safe to relax early? Sadly, you’re not. Most of the states would still require you to file a zero return, yes even if you don’t collect sales tax during the taxable period, you’ll still have to file by the time of filing day. But no matter what, make sure that you file because even if you have zero return, they’ll fine you if you don’t file anything at all. And if you have tax to return, going early could pay off. There are some states that give rewards to those who pay early and even on time.
Zero return- Sales tax return that just states that you didn’t collect anything during the taxable period.
How to avoid an audit?
First of all, the moment you see that you have a nexus don’t go collecting tax sales, make sure that you have a permit for it first. I’m pretty sure any state won’t be happy if you were collecting tax without a permit. No matter what your intention was, you just aren’t allowed to collect them unless you have a permit. Second, make sure that you check if your permit is still valid. Yes, they expire on a specific date and forgetting about it would definitely get you in trouble if you collect a tax. Also take note that once your nexus in a state ends, you have to stop collecting the tax. And when you aren’t using a permit anymore, you have to cancel it. When you do things by the book, I’m sure you won’t have to worry about an audit at all.
How to handle tax if you’re shipping to the US from another country
So now that you have your tax permit, you might be wondering how things are if a customer was from another country. This one is pretty basic if you’re not from the US all you need to do is check if you have a nexus in the state you were shipping to, if you have a nexus then you charge a US sales tax. If you’re still confused by now, the best thing to do at this moment is to contact someone who’s a licensed tax professional and ask their help.
How to handle tax on products that are digital goods
Now, what if your products won’t really go anywhere? We’re talking about online bookings, digital downloads, and the like. Now the way goods are taxed actually vary in every state, there are actually some states that ask you to tax digital goods but there’s some difference with taxing goods that would have to travel. Basically, if a digital good isn’t to be owned if it’s just rented or there’s an expiry, there’s no need to tax. But if it’s something to be permanently owned then it should always be taxed.
If your nexus changes, your filing should change with it
What you have to take note here is that whenever there are changes in your nexus then there would definitely be changes in your filling. And changes in the filling will all depend on the changes made to your nexus. If for instance, you lose nexus in a state, you’ll have to check with the state about how to stop filling and when to stop because it will all depend on the state’s regulations. The best and most ideal time to check your nexus situation again would be when the year starts, this is also the best time to file for other permits if you would need to.
8 wrong things people think about tax
1. Everything is tax-free online
Back in the days, when online selling was still new and not a majority of people buy online, it was true, there’s no tax when you buy online. But just as how everything in this world evolves, it has evolved too and as time goes, the idea that selling online is tax-free becomes more and more untrue. As online selling evolve so does the tax. There are states that are tightening their nexus rules and finding more ways to tax online sales.
2. There’s no need to charge tax in a different state
If you live in a state with no sales tax then good for you, but if you’re selling to those who are from states with sales tax then you’d have to get a permit and charge tax.
3. Based on origin or destination-based tax rules
This always get mixed-up with Nexus and these two are both very different things, and a lot of people always misunderstand this. Basically, this just applies to the way you tax buyers who are from the state you’re based in and nexus is on how you tax people that aren’t from your state.
4. Amazon FBA is the key to not worrying about sales tax
No, no and no. The inventory which is stored in there actually makes a nexus in wherever it is. Now if you’re using this then you’ll have to track where it is all the time, all the time because Amazon could move into a new center.
5. Only big companies would have to pay sales tax
They might go after you now, but they can actually do it legally. That’s unless your sales are like the ones you usually find on craigslist like garage sales then you aren’t required. But if you’re an online store then you would have to pay whether your company is still growing or already big. If you’re fixed on not paying it until your brand grows then make sure you’re sure that fees and penalties outweigh having to manage sales tax. You never know when the tax person would come knocking on your door.
6. Shipping charges are tax-exempted
The rules for all states aren’t the same but usually, buyers are required to pay the taxes on handling and shipping charges. It will all depend on the state, whether what you’re shipping is taxable or not, and how it’ll be delivered. Make sure you check their rules to know how to handle them.
7. You can raise your price and tax included
It’s okay to include the tax in your price for some states but some don’t allow it. It’s best to avoid doing that because it’ll just make things more complicated.
8. There’s no need to tax craft and trade shows
This could both be true or false, again it mostly depends on the state where it’ll happen. There are states that allow you to sell without having to worry about tax on shows while others like NY don’t really allow it.
Whether you’re still starting out as an online store or you have been around and successful for a while now, there’s really a need to check on sales tax on your state and your nexus. Nowadays, whether you’re online or not you have to charge sales tax, that money is used for paying government workers, building better roads, and for other public facilities. And as online shopping is being more and more popular, most states collect sales tax. So make sure that once you start selling, you check your state's regulation about it to make sure you won’t get into any trouble. In this article, you were able to understand how charging sales tax is, and even how to make sure you don’t get any audit. By the time you’re reading this, you already know that most things now, as long as the buyer would own it permanently should be taxed. Even if it’s all digital products. I’ve also told you some common misconceptions about sales tax on your online store so that you get to understand everything about it.