Today’s Biz Ladies comes to us from Mark Faggiano, the founder and CEO of TaxJar, a service built to make post-transaction sales tax compliance easier for Etsy, Amazon, Shopify and other multi-channel, e-commerce sellers. Mark’s passion is solving complex problems for small businesses and today he shares some of his know-how on understanding sales tax for your business. Thanks for offering your expertise on the subject, Mark! —Stephanie
Read the full post after the jump…
Very few business owners hang out their shingle due to an intense love of doing taxes. Unless, of course, they’re starting an accounting practice. The stereotype holds that crafty entrepreneurs especially don’t like fussing with numbers. Well, at TaxJar, we don’t stereotype, but we do know that any business owner trying to make a go of it has a lot better things to do than try to muddle your way through administrative details like sales tax compliance.
On the other hand, we also know that things like sales tax compliance nag at your mind, especially when you could face legal and financial repercussions for making an honest mistake. So we’re breaking down Sales Tax 101 for you right now.
What is Sales Tax?
Sales tax is a tax levied by states and local areas in order to pay for roads, public safety, schools and other publicly funded projects. The state relies on merchants to collect these taxes on each sale to a consumer and then remit them to the state at a periodic time.
Who has to Collect Sales Tax?
If you live and have a physical presence in one (or more) of the 45 states that levies a sales tax, you are required to collect sales tax from your customers.
The fancy way of saying physical presence is “sales tax nexus” and since each state gets to make their own independent laws about taxes and nexus, what constitutes a physical presence will vary from state to state.
How Do I Get Started Collecting Sales Tax?
If you have a sales tax nexus in a state (generally this means yourself, an employee, a warehouse, etc.) then you are required to apply for a state sales tax permit and collect sales tax on all sales to customers in that state. When you apply for your permit, your state will tell you when and how you will remit the sales tax you collect back to them. Sadly, sales tax is a pass-through tax, meaning it passes straight through you back to the state and you don’t get to keep any of it.
Some states throw you for a loop and require sales tax collected on shipping, too. Be sure to check with your State’s Department of Revenue. (Here’s a handy map covering how to get started collecting sales tax in each U.S. state.)
The amount of sales tax you are required to collect varies by state and locality, too. Some states even ask you to collect sales tax based on where your customer lives. This means you (or the platform you sell through) must constantly calculate sales tax rates.
And finally, each state has it’s own way of requiring you to file and remit sales tax. Based on your sales or amount of sales tax you collect, you may be asked to file and remit sales tax annually, quarterly, monthly or even “semi-annually.” Some states require you to file online while others will take a paper return. And most states require you to file even if you don’t have a single cent of sales tax to remit – and they’ll fine you if you forget to file.