Tax key on keyboard
Sales tax collection rules differ by state. — Getty Images/ArtemSam

One of your most important responsibilities as a business owner is to collect and pay sales tax correctly. While each state has its own sales tax policy, some sales tax requirements also exist at the federal level, though they’re far more selective than most state tax laws are.

Though these factors and others can make sales tax seem hopelessly complicated, business owners can take helpful measures to ensure that they’re following their state’s rules.

Like many other contemporary company functions, collecting and paying sales tax has been altered by today’s digital landscape. However, many of the actual sales tax requirements imposed by various levels of government remain relatively unchanged. Understanding these factors can help your company succeed.

This guide will help you learn the ins and outs of sales tax collection and payment requirements by:

  1. Detailing what sales tax is and how it works
  2. Discussing how to register to pay sales tax with your state
  3. Providing an overview of how to collect sales tax from your customers
  4. Detailing how to pay sales tax to your state and local governments

What is sales tax?

Companies pay sales tax on various goods and services. This tax is imposed by governments, to which businesses pay that money directly. Most tax laws allow businesses to collect that fee from their customers at the point of purchase, which is why everything from groceries to appliances is almost always more expensive than the sticker price.

Each state imposes its own tax policy on businesses that operate within its boundaries. Each sales tax amount also varies from state to state, though it generally falls somewhere between 4 and 7%. Alaska, Delaware, Montana, New Hampshire and Oregon are the only states in the country that do not levy a sales tax.

While the federal government technically imposes no sales taxes of its own, it does tax a handful of products no matter which state your company is incorporated in. These include gasoline, cigarettes, indoor tanning and a few other goods and services.

Though taxes aren’t typically that popular of a subject to begin with, the relative complexity of sales tax can make it especially intimidating. Thankfully, business owners can make navigating sales tax easier for themselves and their companies by following a few steps.

How do I register to pay sales tax?

Registering your company to pay sales tax is a relatively straightforward process.

First, ensure that you have your Employer ID Number (EIN) handy. You’ll need this number to obtain a sales tax permit from your state.

Second, find the tax authority in your state that oversees sales tax. The Federation of Tax Administrators maintains an online list of such agencies in each state. You can find your state’s respective taxing authority here.

Third, register for a sales tax permit after you find the relevant state taxing agency. A sales tax permit will allow you to begin collecting and paying sales tax as needed. The permit registration process varies from state to state, though it always requires the aforementioned EIN and generally involves queries about your company’s industry, founder(s) and number of employees.

Keep in mind that the size of your company is almost always irrelevant to whether you're required to pay sales tax. Even if you’re a sole proprietor who operates from within the confines of your home, you still have to pay a sales tax if the product or service you offer is taxable within your state.

Finally, determine your company’s sales tax rate. This rate is informed by several pieces of arithmetic, including where your products are sold and each area’s tax policy. For example, some states, cities and counties charge sales tax based either on the location of the seller or the location to which the product or service your company sells arrives.

In addition, there is no flat sales tax rate for all cities and counties in the country. The more areas your company serves, the more individual sales tax rates you’ll need to calculate for each area.

Fortunately, the aforementioned state taxing authorities sometimes provide helpful information on which locality charges what tax rate, on top of what the state also charges.

[Read more: CO— Strategy Studio: Navigating Tax Season]

Keep in mind that the size of your company is almost always irrelevant to whether you're required to pay sales tax.

How do I collect sales tax from customers?

Registering to pay sales tax is arguably the hardest part of the entire process. Collecting sales tax from customers has been made relatively easy, thanks to technology like point-of-sale (POS) software, accounting software and other useful tools.

There are a few sales tax collection stipulations that are helpful to consider. To start, businesses are legally obligated to display an item’s sales tax on whichever transaction system they use. Fortunately, the vast majority of modern POS software handles that calculation automatically, as do various apps that smaller businesses may opt to use instead.

Most POS software also automatically displays sales tax no matter whether your product is sold in a brick-and-mortar storefront or online. If your company has an e-commerce page, or if your business is entirely digital, your sales tax will typically be that of your company’s home location rather than the product’s destination.

Though it doesn’t happen often, some of your sales may be exempt from taxes depending on what products you sell and for what purpose. Non-profit organizations, for example, can occasionally obtain sales tax exemption. Though tax exemption policies like these can vary considerably, it’s always a good idea to check with your local tax authority to verify whether one of your goods or services is in fact exempt from sales tax. Such exemptions may also be subject to change.

Your final sales tax obligation is simply to record each one. Digitization has made this process much smoother than it used to be — many POS systems automatically catalog sales tax after processing it during a purchase. Implementing a POS system with that kind of versatility can end up saving your company a lot of time and money. Of course, plenty of simpler accounting software exists that can catalog sales tax.

There are some accounting and POS systems that can account for sales tax levied in various locations. These programs can automatically calculate your sales tax and enclose that information within your records. Some of these programs can be pricey, but they’re likely worth the investment if your company does business in multiple areas.

How to remit sales tax

There’s more to paying sales tax than simply sending them to the state. Most states also require business owners to file sales tax reports. Each state demands a different amount of information to be enclosed within these reports. Typically, however, most states require that company owners include information on all of their sales, including transactions that are tax exempt. Some states also require this information to be filed more frequently than others, so check with your local tax office for more details.

Though each state imposes different sales tax payment rates, it’s important to remember that the more sales your company makes, the more frequent your sales tax payments will be. Most states require businesses to pay sales taxes once per quarter, but this frequency may increase to once a month or more if your company makes a lot of sales. In addition, some states may offer a discount if you file your sales tax payments early. As with virtually everything else that pertains to sales tax, this too depends on where your business is headquartered.

Late payments, though, are another story. Though it’s probably not a surprise, state governments are swift to respond to businesses that don’t pay their sales tax on time. Most states typically charge a heavy fine for late tax payments, but others may hold business owners personally liable for late or withheld tax payments.

The federal government may get involved as well. Though the IRS is a federal entity, the organization retains the power to impose a trust fund recovery penalty (TFRP) upon any business that it judges to be willfully ignorant of its local sales tax provisions. As it happens, this penalty also applies to any late payroll taxes, so paying on time is pertinent.

[Read more: What Are Estimated Tax Payments For Businesses?]

Regulatory updates

Business owners who pay their sales tax on time are in good shape, but it never hurts to keep current on your state’s regulations. Taxes change much more frequently at the local, state and federal level than many other political landscapes do, and it's important to make sure that you’re not missing out on a new rate or regulation.

There are several ways that you can keep track of your state and local area’s tax policies. The aforementioned state tax authorities can be great resources for that information. It may also be helpful to check in with your local chamber of commerce or other business organization for sales tax updates.

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Published March 14, 2023