In the US when you make a purchase, or sell an item, you need to factor in sales tax. Sales tax is a type of indirect tax 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 states’ 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 done online, and you can review this comprehensive list to find the relevant registration link.

Calculating sales tax

In most states, there is a statewide sales tax rate, and in many states there are additional local sales tax rates at the county, municipal, and district levels. A sales tax rate for any particular state would include the statewide 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 statewide sales tax: 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 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, store, 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 “ship-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 determine the correct tax rate, you can begin to charge and collect tax from your customers. After you collect sales tax from your customers, you will file a sales tax return and remit the sales tax you collected to the correct state or other local tax authority. Each tax authority’s website will have details on how to file and your due date. Due dates vary from state to state, and the frequency in which you file a return may also vary. Large companies with a higher tax liability will often file more frequently (monthly), and 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 delinquent 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.