Sales tax is one of those things that seems like it shouldn’t be a big deal. Want to start selling a product? Simply collect the sales tax and figure out how to send it in. A lot of times people don’t even do that - they just make the sale and then worry about the sales tax later.
I’m here to tell you that sales tax can be WAY more complicated than you might think. Sales tax is actually one of the “triggers” I use to help small businesses decide when they should outsource bookkeeping. Almost every time we have a new client with sales tax we end up having to fix the account and often find ways they are charging it incorrectly.
Why is it so complicated?
THERE ARE NO MINIMUMS
If you sell one book, one gadget, only ONE item in your state, you are subject to sales tax. You’ll have to register for a sales tax account and file returns. If you’re primarily a service-based business and there is a way to avoid doing product sales, I highly recommend exploring those options before deciding to move forward.
WHAT IS TAXABLE
This appears to be straightforward. Services? Non-taxable. Products? Taxable. However, it doesn’t always work out like that.
For example, what if you have a combination of products and services rolled into one package? How do you deal with that?
Are digital products taxable? This is one that is changing as we become a more digital society and can be different from state to state.
Certain industries can be confusing. Construction is one of them. In Wisconsin, some things are considered “personal” property and taxable, vs “real” property, which is non-taxable (this can also change depending upon the room in the house!). But then it also depends upon if you are repairing or replacing items. There’s a giant publication dealing only with construction sales tax.
Then there are some products that are exempt from sales tax. Our cafe clients have bakery that is non-taxable, but other food and beverage that is taxable.
WHERE IS IT TAXABLE
You may have to charge different sales tax rates within your state depending upon how you operate and the rules in that state. If you’re located in one county/jurisdiction, and you sell at your location, then you use your county’s rate. But if you’re shipping the item to another location, most states say you have to collect and pay THAT jurisdiction’s rate. And if you’re shipping out of state, you don’t charge at all, unless…
You may have to register and pay in other states. This is called nexus, which is a fancy term to decide if you have to collect and remit tax in other states. It may be due to a physical presence (like an employee there or selling at a conference) or an economic trigger (like over $X in sales or Y number of sales). And each state is different.
OTHER SALES TAX CONSIDERATIONS
If figuring out what is taxable and where it is taxable isn’t enough, there are a ton of other nuances that could affect your sales tax. It also keeps changing and shifting due to states passing updated legislation. Here are some other common issues:
Exempt reporting - sometimes your customers could be exempt from paying sales tax and you must track that
Reseller certificates - if you buy items to resell, you shouldn’t be paying sales tax on your purchases, but if you are, you may be able to deduct that from what you pay the state
Use tax - if you buy something from out of state and the vendor does not charge you sales tax, you must report that in your own state
Local taxes - some jurisdictions will have additional taxes on top of state and county, and they may only apply to certain things (like hotels or food)
Marketplace sellers - sites like Amazon and Etsy may collect sales tax for you, but the reporting still varies by state
Once you have a handle on how to charge sales tax, now you have to track and submit the actual returns, which can be confusing in themselves.
The bottom line is sales tax is complicated. None of what I’ve said here is official advice; you must know what the laws are for your particular situation. There are some great resources to start doing research on the web (one of my go-to sites is here). I also highly recommend calling the Department of Revenue for your state and clarifying anything you are unsure about. Document the conversation, and then you have verification for how you are handling your sales tax.
Good luck!