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How to Pay Sales Tax for Small Business
Written by: Mark Stewart
Mark Stewart is the in-house Certified Public Accountant, an accomplished author and financial media specialist.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Updated on May 18, 2023
How to Pay Sales Tax for Small Business
- How to Pay Sales Tax for Your Small Business
- How Online Sales are Taxed
- What are Some Common Compliance Pitfalls for Small Businesses?
- In Closing
- Sales Tax FAQs
One of the best things about starting a new business is the taxes. Just kidding. But you will indeed have to deal with taxes, likely including sales tax at some point. Collecting and paying sales taxes tends to be arduous, but it’s a process you’ll need to know to keep running your business.
Fortunately, this handy guide outlines the steps to take to stay in compliance and up to date on all your tax responsibilities.
How to Pay Sales Tax for Your Small Business
1. Determine if your business is a subject to sales tax
The crucial first step is finding out whether your goods and services are subject to sales tax. State sales tax requirements vary, but generally, sales of tangible goods are subject to sales tax, as are some services. Even if your state does not impose a sales tax, your locality may, so check with your state and local governments.
2. Register with your state’s taxing agency
Your business is subject to sales tax? Then you must register for sales tax to be able to collect and pay them. At the state level, this is usually done with the state’s Department of Revenue. You can usually register online; sometimes a fee is involved. If your locality also imposes a sales tax, be sure to register with your local government as well.
To calculate the sales tax for your state, choose a state from the list below. The following five states currently have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.
Choose Your State
- new jersey
- new mexico
- new york
- north carolina
- north dakota
- rhode island
- south carolina
- south dakota
- west virginia
3. Obtain a sales tax permit
Once you register for sales tax, you’ll receive your sales tax permit, sometimes called a seller’s permit. Some states send it electronically, while others send it by mail. Turnaround times vary by state, but can be up to a few weeks. You may be required to post your sales tax permit on your business premises.
4. Collect sales tax from your customers
From now on, be sure to collect the appropriate amount of sales tax from your customers on every sale. A point-of-sale system will of course calculate the sales tax for you.
5. Keep proper records (accounting books)
Track all collected sales tax in your books so that you know what to report and pay to the government. Accounting software tools, particularly systems that integrate with your POS, make this much easier. Most even print reports you can use to prepare your sales tax returns.
6. Send reports to your state
Every state has their own forms and requirements to report sales tax collected. It may be monthly or quarterly. Check with your state and local government for all the info.
7. Pay sales taxes that you have collected
Finally, you’ll pay the sales tax you’ve collected. When you’re collecting it, it’s a good idea to keep the funds in a separate business bank account so that you have it ready when payments are due. Due dates for payments vary by state and locality, and sometimes by the amount collected, so check with your state and local governments for requirements.
How Online Sales are Taxed
Selling online makes the sales tax process a bit more complicated. Essentially, if you have “nexus” in a state where a sale is made, you must register for and collect and pay sales tax for that state.
A nexus is defined differently in nearly every state, but basically it’s some sort of connection to that state, such as an employee or an office. So for the vast majority of states, if you have a physical presence or representative in that state, you must collect sales tax.
If your business is located in Ohio and you have no nexus in Texas but make a sale there, for instance, you don’t have to collect and pay sales tax in Texas. But you will need to collect and pay sales tax in Ohio.
If you make sales through an online website like Etsy and you send your items to the local fulfillment center to be shipped, you may have a nexus in the state where the fulfillment center is located, and would thus be required to pay sales tax there.
This quickly gets rather complicated, so leaning on accounting software tends to be a wise decision.
What are Some Common Compliance Pitfalls for Small Businesses?
A compliance sales tax pitfall to avoid is collecting sales tax before you have registered for sales tax in that state. This can be easy to do if you make online sales. But keep in mind that collecting sales tax without registration can result in significant fines and penalties.
Another common pitfall is being unfamiliar with the relevant state laws. Certain goods and services are taxable in some states but not others. It’s important to be fully aware of the laws in all states where you have a nexus.
Finally, missing deadlines for sales tax payments is a major no-no that will lead to serious penalties.
Sales taxes are a complicated annoyance, yet they’re also a business necessity. The only smart approach is to take them seriously and commit to meeting your tax requirements, otherwise your business could face major penalties, even dissolution.
To ensure you handle sales tax correctly, you might consider using a reliable software tool or consulting with a respected accountant. Taxes are not a business matter that should be taken lightly.
Sales Tax FAQs
You can manually track your sales tax collected or use a point-of-sale system that calculates and tracks sales tax for you. You should use a point-of-sale system that integrates with your accounting software.
An LLC is what’s called a pass-through entity, meaning that profits and losses are passed through to the LLC members to be reported on their personal tax returns. The LLC itself is not taxed. An LLC can also choose to be taxed as a corporation if it’s financially beneficial.
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