Understanding Sales Tax for Small Business

Collecting Sales Taxes

In most states and in many cities in the U.S., you must collect sales taxes on applicable sales.

Historically, states and cites that charge sales tax only taxed products and not sales. However, now a few states are charging sales tax on a broad range of services; other states are taxing a narrower range of services; and still other states are considering legislation to add service taxes.

Generally, product sales taxes apply on the sale of just about anything to just about anyone. However, there are some exceptions. For example, in some states, particular products, such as purchases of food or clothing under certain threshold amounts, are exempt from sales taxes.

You also do not need to collect sales taxes on sales of products to resellers, such as wholesalers or retailers, who have valid state resale certificates. Ask to see the resale certificate of any wholesaler or retailer with whom you conduct business.

Still another exception is sales made to tax-exempt institutions, such as public schools and libraries.

To make matters more complicated, some states exempt some product sales from sales tax if they are considered to be an integral part of the sale of a service.

You must charge sales tax according to the local laws in any place where you have a physical presence. Physical presence is clear if you have an address, a store inventory, or maintain an employee, such as a sales representative, within a state.

A particularly gray, frustrating, and rapidly changing area is the collection of sales tax by firms that sell products or taxable services in states where they do not maintain a clear physical presence, including firms that sell via the Internet.

Individual states have taken out-of-state companies to court for the collection of sales tax based on Internet sales or the presence of mail-order catalogs within their state. The results of these suits have been mixed. But, the definitions of physical presence are changing and bear watching.

If you are making taxable sales in other states, you should check with your accountant or legal advisor for an up-to-date opinion on your particular situation. The safest route, of course, is to simply collect sales tax in every state where you sell products or services. However, for a tiny business this could be an incredibly onerous task.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.