How to Pay Sales Tax for Small Business: A Guide

If you sell tangible products or services in most states, it’s your responsibility to collect and remit sales tax. Whether you operate a physical store or engage in multistate e-commerce activities, it's important to understand your sales tax obligations. Optimally, you'll acquaint yourself with sales tax rules and laws impacting your business before launch to ensure you avoid compliance issues. Penalties associated with noncompliance can be costly and disrupt your business operations as you work through them.

Use this article as your guide to paying sales tax for your small business. You will learn sales tax basics, how to identify your sales tax obligations, how to apply for permits, along with other tips and ideas for you to consider as you build your operations.

Maintaining compliance while keeping up with ever-changing sales tax rules can feel overwhelming without expert guidance. 1-800Accountant's proactive financial compliance solutions for your business ensure your rates are current and you never miss a deadline.   

Getting to Know Sales Tax Basics

What Sales Tax Is All About

Sales tax is a consumption tax imposed at various levels of government on the sale of goods or services and shouldn’t be confused with a use tax. Sales tax rates vary widely across the country, in individual states, and even across counties, and will fluctuate over time.

While the average taxpayer might not be enthusiastic about paying sales tax since it adds to the cost of what they've purchased, many benefit from the public services and infrastructure these taxes fund. Each year, billions of dollars generated by sales tax collection go toward transportation, public health and safety, libraries, schools, and social services, among other areas of public life. 

How Sales Tax Can Be Different Everywhere

Sales tax rates can differ everywhere and fluctuate, adding to the complexity of your obligations. For example, the passing of Measure A in California, which was approved to help fight homelessness in Los Angeles County, increased the sales tax rate. While what it's replacing, Measure H, has a quarter-cent tax, Measure A doubles that to half a cent. Even though the sales tax rate has increased in Los Angeles County, that doesn't mean the rate is the same in each locality. Yucaipa's new 8.75% sales tax rate differs from the 11.25% sales tax rate consumers would be responsible for paying in Lancaster (both are in Los Angeles County). Lancaster's sales tax rate is among the highest in the nation.

Sales tax rates can differ dramatically for the online sale of digital goods across state lines, although not every state participates. Currently, 30 state govs tax some type of digital goods at varying rates. Exemptions and the rules that separate certain digital purchases from others created by local governments can be dizzying, further adding to the complexity of selling digital items across state lines. A majority of digital sales are tax-exempt in five states.   

Figuring Out Your Sales Tax Duties

What Nexus Means for Your Business

A nexus refers to a connection between you and a local jurisdiction where you conduct business. When you have a nexus, it means a taxing authority will impose taxes on your business activities. State, city, and local tax authorities can impose sales taxes using different tax rates and thresholds. Businesses typically establish this via a physical presence or an economic nexus.

A physical presence nexus generally occurs when your business has employees or tangible personal property in a state, including a warehouse, office, or inventory. While nexus rules can be somewhat consistent from state to state, there is some variation. For example, some states do not consider inventory as a qualifier for a physical presence nexus.

While a physical presence nexus depends on your business's physical activity in the state, an economic nexus depends on your business's economic activity in the state, even if you lack a physical presence. This relatively new standard was established due to the Wayfair decision.

South Dakota v. Wayfair, Inc., a 2018 Supreme Court case, focused on whether South Dakota could impose a sales tax on online seller Wayfair even though it had no physical presence in the state. The Supreme Court sided with the state and approved South Dakota’s economic nexus tax law, which used an economic nexus threshold of 200 transactions or $100,000 in sales receipts.

After the Wayfair decision, many states adopted similar economic nexus sales volume thresholds. Most jurisdictions consider the number and/or dollar value of transactions by out-of-state sellers.

Understanding and managing nexus-related obligations without the tax experts at 1-800Accountant to guide you through the process can be challenging. Schedule a call today to learn how we can help. 

Knowing What's Taxable and What's Not

It's essential to distinguish between purchases that are taxable and purchases that aren't. Clothing and other tangible property, services, and digital goods typically qualify for state sales tax.

Traditional grocery staples such as meat, milk, and vegetables are exempt from state-level sales tax in most states. While several states feature an exemption, grocers are usually still responsible for collecting local sales tax. However, they won't collect any tax on groceries made via the Supplemental Nutrition Assistance Program (SNAP). Federal laws exempt groceries purchased via SNAP from all state and local sales tax.    

How to Register for a Sales Tax Permit and Keep Compliant

Steps to Get Registered

Avoid penalties and other issues by obtaining a permit before collecting sales tax. While the registration process may differ among states that have sales tax, these are the broad steps you should take to get your business registered.

1. Go to your state's Department of Revenue webpage for registration tax forms and instructions. 

2. While some states may require a paper form, register online if you can for the most immediate results. 

3. As you complete the registration process, you will provide your business name and address, EIN, business type, sales estimates, and the date you will start collecting sales tax.  

4. Submit your completed registration form with a nominal fee (if required) to your state's Department of Revenue. 

Waiting for approval via mail may take weeks, while online approval can be instantaneous.  

Staying on Top of Compliance

Once you receive your sales tax permit, the real work begins. In some states, sales tax permits are valid through the life of the business and do not require renewal. However, if your state requires sales permit renewal, ensure you understand the frequency and fees needed to remain compliant. 

Compliance extends to recordkeeping and other areas of your business. Make sure your records and business information are accurate and up to date.

Preparing taxes and filing by each due date to ensure compliance can be challenging without 1-800Accountant's affordable, full-service business tax preparation and filing solution. 

Collecting and Filing Your Sales Tax

Getting the Tax Right and Making It Clear

To calculate the sales tax a customer owes, you'll need to account for a taxable item's amount and the sales tax rate, which could be a combination of state and local taxes. Many businesses rely on software and other innovations to handle these calculations, such as the AI-powered tax tools integrated with platforms like Salesforce’s Agentforce.

Transparency is an integral part of the sales tax process, including the proper display of sales tax on receipts or invoices that your business issues. Your receipt or invoice should:

• Display an itemized list of purchased goods or services. 

• Clearly show applicable sales tax and the tax amount. 

• Disclose the total and subtotal associated with the purchase.

How Often to File and the Ways to Do It

State requirements and sales volume often dictate your business’s filing frequency for sales tax returns. Filers should reach out to representatives at the Department of Revenue or a qualified tax professional to determine whether they are responsible for monthly, quarterly, or annual sales tax return submissions.

Electronic filing and payment options streamline the process and help ensure materials are submitted by each deadline, aiding your compliance efforts.   

Steer Clear of Penalties

Filing a sales tax return past the deadline and submitting with incorrect sales tax calculations are common mistakes that invite costly, disruptive penalties.

To prevent issues, mark your income tax return preparation start date and applicable deadlines in a digital calendar or other tool. Using digital tools or do-it-yourself accounting software can aid in more accurate calculations. 

Why Keeping Sales Tax Records Matters

Why Good Recordkeeping is Crucial

Bookkeeping ensures that all financial data is properly recorded by creating a general ledger. The general ledger is where information such as debits and credits is recorded. Maintaining the ledger is critical, detail-heavy work. Its thorough information provides the best financial data interpretation, decision-making, and forecasting tools. 

Bookkeepers maintain the sales tax records for your small business, handle payroll, and create invoices. They also address the critical task of financial reconciliation, which entails ensuring your bank statement matches the records in the general ledger.

If you handle recordkeeping responsibilities for your business, maintain sales receipts, exemption certificates, a transactions log, and other critical documentation. Maintaining accurate and up-to-date sales tax records will aid in your audit defense should you receive notice from the IRS.  

Tips for Keeping Your Records Straight

It's challenging to keep your records straight without the right direction. Keep manual recordkeeping processes to a minimum while embracing digitization and cloud storage so you can pick up where you left off from any device.

Digital tools and do-it-yourself software can help automate your recordkeeping practices while improving accuracy and efficiency. Popular do-it-yourself software is compatible with 1-800Accountant's proprietary bookkeeping platform, ClientBooks, making for seamless integration into our affordable, full-service bookkeeping solution powered by real bookkeepers.  

Crafting a Smart Sales Tax Plan

Making Things Easier with Automation

Automating sales tax calculations and filings can save time and reduce or virtually eliminate errors. When evaluating digital tools for your small business operations, look for features such as: 

• Accounting software integration with e-commerce platforms for seamless tax management

• Real-time sales tax calculation capabilities 

• Regular rate, compliance updates, and exemption management to ensure compliance 

• Streamlined filing and reporting processes

Keeping Up with Real-Time Tax Calculations

Customers don't have time to wait for manual or incorrect tax calculations, making automated, real-time sales tax calculations essential for modern small businesses.

Whether you have a physical point of sale or sell exclusively online, several software platforms are available that correctly and automatically calculate tax during a sale. These platforms take into account the current sales tax rate, customer location if selling online, and all applicable rules and protocols your business must abide by while producing the correct amount of tax owed. 

Getting Ahead with a Smart Tax Strategy

Developing a year-round proactive sales tax strategy supporting your business activities is essential to staying ahead. Use insights from your quarterly tax planning activities to create a smart tax strategy that minimizes liabilities while maximizing efficiency, or refer to the experts at 1-800Accountant to develop and implement a business tax strategy on your behalf.

1-800Accountant offers year-round support and continuous access to expert advice and insights that will optimize long-term sales tax strategies while maintaining IRS compliance. 

Navigating Sales Tax in a Digital World

What E-commerce Means for Your Sales Tax

Your obligations related to e-commerce activities are shaped by sales, volume, business location, customer location, and the type of products you sell. For example, 30 states currently tax digital goods at varying rates. Some exemptions and rules help business owners understand which digital products qualify; five states exempt virtually all digital goods sold to their residents.

Because you will likely lack a physical presence in most of the states you sell to, a physical presence nexus won't apply. Instead, you will have an economic nexus if your sales activities qualify. As a result of the Wayfair decision, the Supreme Court sided with South Dakota. It approved its economic nexus law, which used an economic nexus threshold of 200 transactions or $100,000 in sales receipts. Other states have adopted similar economic nexus sales volume standards and consider the number and/or dollar value of transactions. 

Tackling Global Sales and Tax Challenges

International sales tax considerations will complicate your US-based sales tax obligations. Cross-border transactions, Value-Added Tax (VAT), and Goods and Services Tax (GST) will add significant complexity to your e-commerce business in addition to unforeseen compliance challenges.

While automation and digital tools help keep your financial materials accurate and up to date, whether you sell domestically or internationally, they cannot provide the targeted guidance and insights that international tax advisors offer.

We suggest speaking with a tax advisor before selling internationally to ensure compliance and a smooth transition to new and untapped markets. 

What to Do if You Face a Sales Tax Audit

Getting Ready for an Audit

A sales tax audit can be triggered for numerous reasons, including discrepancies in your business tax filings, nexus issues, or by random selection, meaning you did everything to maintain compliance successfully, but the IRS selected your business for an audit anyway. We understand how discouraging this can be.

Defending against audits is another reason your records should be up to date, comprehensive, and organized. The IRS may examine your transaction history and exemption certificates, among other documents, as it investigates.

Receiving an audit notice is never fun, but having accurate, audit-ready records and materials will provide breathing room during a difficult time. 

How to Handle an Audit

Receiving an IRS sales tax audit notice can be stressful, but knowing the protocols for responding can ease your worries.

Your goal should be to resolve your audit as quickly and smoothly as possible. Once you receive notice, make sure you know your rights and request clear explanations from the IRS in all notices and correspondence while verifying the audit method, which can be in person or by mail. Make sure you cooperate with IRS requests and that you respond promptly, which will accelerate the audit's conclusion.

If your business receives an audit notice, you don't have to face it alone with 1-800Accountant's audit defense service, which ensures you emerge successfully from your small business audit.

Unlock the Benefits of Expert Sales Tax Management with 1-800Accountant

Take the Next Step with 1-800Accountant

As you can see, understanding sales tax basics, maintaining compliance, leveraging technology, and developing smart tax strategies is essential to achieving and maintaining thriving business operations. Managing sales tax considerations is time-consuming and can distract from other aspects of your business. Avoid sales tax headaches before they start when you trust 1-800Accountant, America's leading virtual accounting firm, with your sales tax work.

Learn how our proactive solutions can simplify sales tax management, reduce compliance risks, and optimize tax strategies for your small business. Schedule a quick consultation–usually 30 minutes or less—to learn how tax advisory and business tax preparation and filing will help you maintain full IRS compliance with a minimal tax liability.