How to collect sales tax

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  1. Introduction
  2. Registering for a sales tax permit
  3. Calculating sales tax
  4. Collecting sales tax

When you make a purchase or sell an item in the US, you need to factor in sales tax. Sales tax is a type of indirect tax that is levied on the sale of certain goods and services in the US. It's called an "indirect tax" because it is imposed on the business but paid by the customer. The business collects the tax from the customer and is responsible for sending (remitting) the tax to the appropriate government agency at a set due date.

Here's a guide to collecting sales tax, including how to register for a sales tax permit, how to calculate sales tax, and what to do when it's time to file and remit.

What's in this article?

  • Registering for a sales tax permit
  • Calculating sales tax
  • Collecting sales tax

Registering for a sales tax permit

Before you begin researching sales tax rates, the first step to collecting tax is to register for a sales tax permit in the state (or states) in which you have sales tax nexus. Sales tax nexus commonly occurs in two ways: physical or economic. Physical nexus means having enough tangible physical presence or activity in a state to merit paying sales tax in that state. Economic nexus means passing a state's economic threshold for total revenue or the number of transactions in that state. These thresholds vary by state – learn more about what creates economic nexus.

You need to assess where you have met sales tax nexus requirements and register for a permit in those states. To register for a sales tax permit, you'll need general business information, and certain states charge a small fee for registering. Registration is completed online and you can review this comprehensive list to find the relevant registration link.

Calculating sales tax

In most states, there is a state-wide sales tax rate. However, in many states, there are also additional local sales tax rates at the county, municipal and district levels. A sales tax rate for a particular state would include the state-wide sales tax rate plus any local sales tax rates. To put it into perspective, there are more than 11,000 tax jurisdictions in the US, all with different rates and regulations. It's important to note that there are five states that do not have a state-wide sales tax. These are Alaska, Delaware, Montana, New Hampshire and Oregon. However, there could still be local sales tax rates to consider in these states.

To determine the correct sales tax rate, research each state and jurisdiction individually to ensure that you're collecting the correct amount of tax. Average state sales tax rates, combined with local tax rates, are generally between 6% and 9%, but may be as high as 11.5%.

States usually require businesses to collect sales tax in one of two ways:

  • Origin-based sales tax collection
  • Destination-based sales tax collection

This concept is also commonly referred to as "sales tax sourcing". Businesses that are based in states with origin-based sales tax sourcing may be required to collect sales tax based on a location other than the customer’s address, such as the business’s location. If your business is based in an origin-based state, such as Texas for example, you would determine the sales tax rate at your home, warehouse, shop or other headquarters. You would then charge all your customers in Texas that sales tax rate.

Businesses that are based in states with destination-based sales tax sourcing are required to charge the sales tax rate at the customer's "deliver-to" or other destination-based address. As the business, you are required to charge the sales tax rates where your customer is located. Most states use this type of sales tax sourcing. Interstate sales are always subject to the destination-based tax collection.

Collecting sales tax

Once you have determined the correct tax rate, you can start charging and collecting tax from your customers. Once you have collected sales tax from your customers, you will file a sales tax return and remit the sales tax that you have collected to the correct state or other local tax authority. Each tax authority's website will have details on how to file your tax return and your due date. Due dates vary from state to state, and the frequency with which you file a return may also vary. Large companies with a higher tax liability will often file more frequently (monthly), while smaller companies might only be required to file quarterly or annual returns. Filing on time is the best way to avoid the penalties and interest that come with a late filing.

Even if you have not collected sales tax during a reporting period, you may still need to file a return. These are called "zero returns", and while you will not remit any tax to the state, you are still required to file a return.

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