How to Determine and Collect the Appropriate Sales Tax

It might be difficult to charge sales tax. Learn when and how you must charge sales tax to your consumers.

What you’ll discover:

Do I have to charge sales tax to my customers?
What sales tax exemptions are available to my company?
How do I collect sales tax in my state?
What should I be aware of while charging out-of-state sales taxes?

Sales taxes vary by state and even within a state. States are now progressively taxing services that were formerly exempt from sales tax. The advent of ecommerce has made tax compliance more difficult for small firms. Sales taxes are not levied in Alaska, Delaware, Montana, New Hampshire, or Oregon. Answers to frequently asked questions concerning when and how a small company levies sales taxes may be found here.

Do I have to charge sales tax to my customers?

Unless you live in one of the five states mentioned above that do not levy a sales tax, every retail transaction is believed to be subject to sales tax unless an exemption applies. While retail transactions were the primary aim of sales taxes, state and municipal governments have increasingly levied them on services as well.

The first step is to determine if the goods or services you offer are subject to sales tax in the state in which you operate. While this seems to be a straightforward question, you should consult with a lawyer. The next step is to assess if an exemption applies to a particular transaction. Exemptions are discussed in further detail below. If no exemption applies, your company is required to collect and submit sales tax to the appropriate state or local taxation body.

Your state or local taxation authority may punish you if you fail to collect and submit sales tax when needed. Even if you did not collect sales taxes from your consumers, your company may be liable for them. You may also be required to pay interest and penalties, and your company and personal assets may be confiscated. Moreover, most states require that sales tax be explicitly indicated on client receipts and invoices.

What sales tax exemptions are available to my company?

Every state with a sales tax provides exclusions for certain purchases. While rules vary by state, sales tax exemptions are often based on one of the following:

The purchaser’s identity.
The application of the item or service.
The sort of property bought.

Some buyers are excluded from paying sales tax. States, for example, are prohibited by federal law from collecting sales tax on purchases made by the federal government. Most states have comparable statutes that prohibit the collection of sales tax on transactions made by the state and its cities, counties, municipalities, and other government bodies. Moreover, several states exclude charitable, religious, and educational organizations from paying sales tax.

Because of the nature of the commodity, sales tax is not always levied on a transaction. Several states, for example, exempt farmers from sales taxes on agricultural supplies and equipment. Manufacturing exemptions are common in several states. If this exemption applies, the purchaser may be required to establish eligibility, such as with a state-issued certificate.

Food, prescription prescriptions, medical gadgets, and clothes are examples of necessary commodities that may be excluded from sales tax. In certain situations, states may not totally exclude these items from sales tax, but may apply a lesser tax rate instead. Consult a lawyer if you are unsure if your company qualifies for a sales tax exemption.

How do I collect sales tax in my state?

You must first establish which transactions are subject to sales tax and how much must be collected. Each state has its own set of regulations and rates for sales taxes. If you simply offer a few items or services in one or two places, you may be allowed to set your own tax rate for each transaction. Whether you offer a variety of items or services, or if you sell in many places, you should put up a system to ensure you are charging the right sales tax.

Before you collect sales tax from clients, you may require a permission from the state or another local authority. After you’ve been granted permission, you may start collecting sales tax from your consumers every time you make a transaction. Normally, merchants deduct the sales tax amount separately for the benefit of the client.

What should I be aware of while charging out-of-state sales taxes?

You may be obligated to collect sales tax in numerous states if you have a tax presence (also known as a “nexus”) in a state other than your home state. The regulations are complicated, but they may apply if your company owns property in another state, employs people in another state, or just does business in another state.

If you sell to consumers who live in the same state as your firm, you must normally collect sales tax. You may also be obliged to collect sales tax from clients in other states. Nonetheless, several states exclude internet purchases.