Do I have to charge customers sales tax?
Unless you are in one of the five states listed above that don't impose a sales tax, each retail transaction is generally presumed to be subject to sales tax unless an exemption applies. Although retail transactions were the original targets of sales taxes, state and local governments have increasingly imposed sales taxes on services as well.
The first step is determining whether the items or services you sell are subject to sales tax in the location that you do business. Although this sounds simple, you may want to ask a lawyer. Next, you need to determine whether an exemption applies to a specific transaction. Exemptions are covered in more detail below. If no exemption applies, then your business must collect and remit the sales tax to the proper state or local taxing authority.
If you do not collect and remit sales tax when required, your state or local taxing authority may penalize you. Your business may be on the hook for the sales taxes, even if you did not collect any from your customers. You may also owe interest and fines, and your business and personal assets could be seized. Additionally, most states require that sales tax be separately stated on receipts and invoices provided to customers.
What sales tax exemptions exist for my business?
Every state that has a sales tax also has exemptions for certain transactions. Although laws are different in each state, sales tax exemptions are usually based on one of the following:
- The identity of the purchaser.
- The use of the item or service.
- The type of property purchased.
Certain purchasers are exempt from sales tax. For example, because of federal laws, states cannot collect sales tax on purchases made by the federal government. Most states have similar laws that prevent sales tax from being charged on purchases by the state and cities, counties, towns, and other government entities within the state. Additionally, many states exempt sales tax on purchases made by charities, churches, and educational institutions.
Sometimes, sales tax is not imposed on a transaction because of the product’s use. For example, many states offer exemptions to farmers on the sale of products and equipment related to agriculture. Many states have similar exemptions in manufacturing. Typically, if this exemption applies, the purchaser may need to demonstrate that it qualifies for the exemption, such as with a state-issued certificate.
Some essential items may be exempt from sales tax, including food, prescription medications, medical devices, and clothing. In some cases, states may not completely exempt these purchases from sales tax, but may impose a lower tax rate instead. If you have questions about whether a sales tax exemption applies to your business, ask a lawyer.
How do I collect state sales tax?
First, you need to determine which transactions are subject to sales tax and how much needs to be collected. Each state has its own sales tax laws and rates. If you sell only a few products or services and only in one or two locations, you may be able to determine the tax rate to charge for each transaction. If you sell many different products or services, or if you sell in many different locations, you may want to set up a system to make sure you are charging the correct sales tax.
Before you collect sales tax from customers, you may need a permit from the state or another local government. Once permitted, you can begin collecting sales tax from your customers every time you make a sale. Typically, vendors itemize the sales tax amount separately for the customer’s benefit.
What should I know about charging out-of-state sales taxes?
If you have a tax presence (often referred to as a “nexus”) in a state other than your home state, you may be required to collect sales tax in multiple states. The rules are complex, but they may apply if your business has property in the other state, has employees in the other state, or simply does business in the other state.
In an online business, you generally must collect sales tax if you sell to customers that are in the same state as your business. You may also be required to charge sales tax to customers that are located in other states. Many states, however, exempt online sales.
Sales tax is a complicated and constantly changing area of law. If you have legal questions about sales tax, or your business, reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.