When to Collect and Remit

As your small business flourishes and reaches new customers, understanding sales tax becomes a vital part of your financial journey. While it might seem like a complex area, mastering the basics of sales tax collection and remittance is a powerful step towards seamless compliance and sustained growth. By proactively managing these obligations, you ensure your business operates smoothly, avoids penalties, and maintains a strong financial foundation.

Embrace the clarity that comes with understanding sales tax – it’s a sign of your business’s expanding reach and success!

What is Sales Tax?

Sales tax is a consumption tax levied by state and local governments on the sale of certain goods and services. As a business owner, you act as an agent for the government, collecting this tax from your customers at the point of sale and then remitting it to the appropriate tax authority. It's crucial to remember that this money isn't yours; it's collected on behalf of the state and local jurisdictions.

The Foundation: Understanding Sales Tax Nexus

Before you can collect sales tax, you must determine if your business has a "sales tax nexus" in a particular state or locality. Nexus is the legal connection between your business and a state that triggers a sales tax obligation. If you have nexus in a state, it means you are required to collect and remit sales taxes on taxable sales within that state.

Nexus can be established in various ways, and it's essential to be aware of these connections:

• Physical Nexus: This is the most common type of nexus. You establish physical nexus if your business has a tangible presence in a state. This includes:

  • Owning or leasing an office, storefront, warehouse, or factory.

  • Having employees, agents, or representatives working in the state.

  • Storing inventory in a warehouse or fulfillment center within the state.

  • Regularly attending trade shows or conventions in the state for the purpose of making sales or taking orders.

• Economic Nexus: This type of nexus is established when your business exceeds certain sales thresholds (either a specific dollar amount of sales or a number of transactions) into a state, even if you don't have a physical presence there. These thresholds vary by state. For example, many states have an economic nexus threshold of $100,000 in sales or 200 transactions.

  • Changes for 2025: It's important to stay updated on evolving economic nexus rules. For instance, effective January 1, 2025, Alaska will eliminate the 200-transactions threshold for establishing economic nexus, meaning only the $100,000 sales threshold will apply. Many other states are also adapting their tax laws to broaden economic nexus definitions and focus more on taxing digital goods.

• Marketplace Facilitator Nexus: The rise of online selling platforms has introduced a significant development in sales tax: marketplace facilitator laws. These laws, which are becoming increasingly common across states, shift the responsibility for sales tax collection and remittance from the individual third-party seller to the marketplace facilitator (the platform itself, like Amazon, Etsy, or eBay).

  • How it Works: If you sell through a platform that is considered a marketplace facilitator in a state where you have nexus, the marketplace is generally responsible for calculating, collecting, and remitting the sales tax on those sales. This can significantly simplify sales tax compliance for many online sellers, as the burden is lifted from their shoulders for transactions conducted through the platform.

  • Your Responsibility: While the marketplace handles sales tax for sales made through their platform, you still need to understand your obligations for any direct sales you make outside of these marketplaces (e.g., through your own website). You also need to verify that the marketplace is indeed collecting and remitting sales tax on your behalf in the states where you have nexus. This ensures you avoid any unexpected liabilities.

When to Collect Sales Tax: Product Taxability and Exemptions

Once you've determined where you have nexus, the next step is to understand what is taxable.

• Taxable Products and Services: Whether a product or service is taxable varies significantly by jurisdiction. Some states tax all tangible personal property, while others also tax certain services. For example, Florida is repealing its sales tax on commercial rentals effective October 1, 2025, which will impact businesses that lease commercial real property there.

• Sales for Resale: If you sell goods to a customer who intends to resell them, those sales are generally exempt from sales tax. Your customer must provide you with a valid resale certificate to document this exemption. This is common in wholesale, manufacturing, and construction industries.

• Use Tax: If you purchase taxable items for your business without paying sales tax (e.g., from an out-of-state vendor without nexus in your state, or if you withdraw inventory for business use), you may owe "use tax" to your state. This is essentially a sales tax on purchases where sales tax wasn't collected at the time of sale.

The Remittance Process: From Collection to Filing

Once you've collected sales tax, you are legally obligated to remit that money to the appropriate government tax authority.This involves a clear, step-by-step process:

1. Register with the State: Before you collect any sales tax, you must register with your state's taxing agency (typically the Department of Revenue) to obtain a sales tax permit or license. This authorizes you to collect tax.

2. Collect Accurately: At the point of sale, collect the correct sales tax amount from your customers based on the applicable rate for the location where the sale is made. Rates can vary by state, county, city, and even special districts (e.g., North Carolina's rates include state, local, and transit taxes).

3. Maintain Meticulous Records: This is paramount! You must keep detailed records of every sale, the amount of the sale, and the sales tax collected. This includes sales slips, invoices, cash register tapes, and records of both taxable and nontaxable sales. You also need records of your purchases to substantiate expenses and cost of goods sold, and to prove the taxable status of your purchases.

   • Segregate Funds: Consider maintaining a separate bank account for your sales tax receipts. This helps ensure the collected sales tax money isn't accidentally used for other business or personal expenses, making it easier to remit accurately.

4. File Sales Tax Returns: You must file sales and use tax returns with the department on a regular schedule—monthly, quarterly, or annually—as determined by your state based on your sales volume. You must file a return by its due date, even if you have no tax due for the filing period. Many states now require electronic filing.

   • Changes for 2025: Some states are streamlining their filing processes. For example, starting with the April 2025 filing period, Virginia will require all sales tax filers to use a single Form ST-1, replacing several older forms.

5. Remit Payments: Along with filing your returns, you must remit the collected taxes to the state. This is usually done through an online portal provided by the state's tax authority. Due dates vary by state but are often around the 20th of the month following the filing period.

Why Professional Guidance is Invaluable

Sales tax compliance can be one of the most challenging aspects of running a small business due to the varying rules across thousands of state and local jurisdictions. Miscalculations, missed deadlines, or incorrect reporting can lead to penalties, interest, and even legal action. This complexity is further amplified by the evolving landscape of online sales and marketplace facilitator laws.

A qualified tax professional or sales tax specialist can be an invaluable partner in navigating these complexities. They can:

• Determine Nexus Obligations: Help you accurately identify where your business has sales tax nexus, both physically, economically, and through online marketplaces.

• Ensure Product Taxability: Advise on which of your goods and services are taxable in each jurisdiction.

• Streamline Processes: Assist with registration, setting up efficient collection systems, and managing filing frequencies.

• Ensure Compliance: Keep you informed about changing tax laws, rates, and reporting requirements in all relevant jurisdictions, including updates to economic and marketplace facilitator nexus rules.

• Minimize Risk: Help you avoid costly penalties and ensure your business maintains excellent standing with tax authorities.

By proactively seeking expert advice and implementing robust systems, you can confidently manage your sales tax responsibilities, allowing your small business to thrive and expand without unnecessary financial surprises!

The information provided here is for general educational purposes only and should not be considered personalized tax advice. Sales tax laws are complex and vary significantly by jurisdiction. For guidance on your specific sales tax obligations and strategies to optimize your business's financial operations, it is highly recommended to consult with a qualified tax professional.