The Simple Guide to Sales Tax
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Most states, and many cities, have laws requiring businesses to pay sales tax. That sounds easy, but figuring out which purchases need sales tax and what tax rate to charge can be tricky. Here's how to figure it out:
1. List states where you have a connection
You're only required to pay sales tax in states where you have a physical connection, like an office, storefront, warehouse, or employee. And you can have sales tax connections in multiple states.
For example if your business is headquartered in California, you'll pay sales tax in California. That means you'll only charge sales tax to customers who physically purchase the items in California or have the items shipped to a California address.
Once you've listed everywhere you need to pay sales tax, check those state and local websites to find answers to the questions below.
2. Find out how much tax you need to charge
You'll need to determine if you're in an origin-based or destination-based state.
In an origin-based state, you'll charge the sales tax rate where you are located. For example, if your business is in Los Angeles, California, you'll charge the California state tax rate (7.5%) + the Los Angeles county tax rate (2%). The origin-based states are Arizona, California, Illinois, Misissippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia.
In a destination-based state, you'll charge the sales tax rate where the items are delivered. For example, if your business is in Las Vegas, Nevada, and a purchase is delivered to Reno, Nevada, then you'll need to charge the sales tax rate for Reno. This type of tax rate is tricky because your payment system will need to properly calculate the different tax rates based on shipping address and keep a complete record for your sales tax reports.
The destination-based states are Alabama, Arkansas, Colorado, Connecticut, DC, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, South Dakota, Vermont, Washington, West Virginia, Wisconsin, Wyoming.
Alaska, Delaware, Montana, New Hampshire and Oregon do not charge a sales tax.
3. Find out what products and services need sales tax
Typically, not all products and services need a sales tax. Many states do not tax services, shipping, wholesale, unprepared food, or clothing. In some states, it even matters how purchases are itemized in your online checkout. Find out your state and local sales tax laws to determine if your products and services even need to be taxed.
4. Determine when are your sales tax reports and payments due
Typically, you'll need to file reports and pay sales tax on a quarterly, monthly, or annual basis. If you know when to expect sales tax payments, you can plan financially and avoid penalty fees.