The first time you set up a business, the issue of collecting, reporting, and remitting sales tax may be completely unfamiliar territory. And if you do business in more than one state, it gets even more complicated as each state (and some municipalities) has its own tax laws.
Before anything else, though, you need to determine whether those laws even apply to your business Here are the basic steps to making that determination — bearing in mind that tax laws are constantly changing.
Step 1: Does Your State and/or City Have Sales Tax?
All except five U.S. states collect sales tax on products and services. The five that don’t are Alaska, Delaware, Montana, New Hampshire and Oregon. However, Alaska and Montana do allow localities to collect sales tax, so you might not be completely off the hook if you’re in those states. Check with your state’s sales tax agency for details.
Step 2: Is Your State’s Tax Origin- or Destination-Based?
Origin-based tax means that you must charge tax at the point where the sale is completed — usually your business location. Destination-based tax is applied at the point the product/service is received or used — the customer’s location. Most states use the destination-based system, meaning that if you have customers in multiple states, you’ll be responsible for collecting the tax in every one of those states.
Step 3: Are You Selling a Product, a Service or a Hybrid?
Tangible personal property is subject to sales tax everywhere tax is collected. “Tangible” means property you can touch: consumer goods, gasoline, restaurant food, etc. Although digital downloads (music, books, movies, etc.) are not really tangible, many states are aiming to cash in on this booming market by requiring sales tax.
Common exemptions to taxation are food bought for personal use (not resale) and prescription drugs. Also, “tangible property “does not include intangible personal property such as stocks and bonds; or intellectual property such as patents and trademarks.
Many services are also subject to sales tax. Often, professional services such as doctors, lawyers, and accountants are not taxed, but personal services such as hair salons are.
A use tax for such businesses as hotels, car rentals, admission to amusement or sports venues, and selling service warranty contracts is usually applied.
Hybrid means you are selling both goods and services. For example, you install or repair computers, which is a service, but you also sell the hardware, software or replacement parts, which are products. Another example of a hybrid is a veterinarian who provides medical services (not taxable) and sells pet products (taxable).
Step 4: What Goods and Services Does Your State Collect Sales Tax on?
As we mentioned above, it’s imperative that you find out exactly what your state and municipality require with regard to your business. Here’s the website page for the Florida Department of Revenue as an example.
Step 5: Should You Collect Tax on Internet Sales?
This area of tax law is changing at the speed of the internet. Ever since Wayfair lost their case with the Supreme Court in 2018, the door has been opened for states to require sales tax on goods and services you sell from your e-commerce website to customers residing in their state. At the moment, most states only go after sellers who have more than 200 transactions or $100,000 in sales per year; but that could change soon.
Sales tax collection is becoming more complex every day. If this is one headache you’d rather not deal with, Xendoo can handle it all for you. Our tax experts will ensure that you’re registered, reported, and remitted — without you lifting a finger. After all, your time is better spent bringing in those sales in the first place!