Small Business Sales Tax: What You Should Know
Tips to protect your business’s reputation.
If you’re doing business in Virginia, but also in New York, Main, Maryland, and Tennessee… which state collects the sales tax? Don’t feel bad if you’re unsure about which tax laws to follow in this kind of a business environment. They are often confusing for small businesses, especially those who operate online and in multiple states.
“Wherever you have a substantial presence is where you have to collect and pay sales tax,” explains Tretta Bush, accountant at Tretta Bush & Associates in Norfolk, Virginia. “Sales tax is a resell tax imposed by the state and/or local government paid by the purchaser of the product or service.”
Still confused? Here’s a breakdown of some common questions answered:
What defines a substantial presence? If you have a “nexus” — a physical presence — such as a brick and mortar, employees in that state, and/or a salesman that you’re paying commission to in that state, then you have the responsibility of collecting and paying a sales tax in that state. But, when you’re dealing with e-commerce, there are two types of determinations: a click-through nexus and an affiliate nexus.
What’s the difference? A click-through nexus, which is what most e-commerce sites are, means that you have an employee in another state that is generating sales for your business in that state.
Example: “A Virginia online retailer hires a salesman in New York and that salesman is there to generate business from customers and redirect them back to the Virginia retailer’s website. Since you are using an employee to generate sales for you within that state you must pay a sales tax in Virginia and New York,” says Bush.
An affiliate nexus, however, is when the remote retailer creates a business in another state and that remote retailer has substantial interests or ownership in that business. It can also mean that the business is affiliated with the remote retailer in that they sell their product. “Essentially, you are selling the same product, but the business is operating as an independent entity with a different EIN number,” explains Bush. So you only have to pay taxes on the affiliate nexus’ sales on your product(s), nothing else.
Do all states require a sales tax? Not all states require a sales tax. In fact, Alaska does not have a statewide sales tax, but it’s individual municipalities can set their own taxation rates. Other states such as Delaware, for example, do not have a local or state sales tax. To find out your state’s taxation rate, visit your state’s Department of Taxation website.
Are some transactions exempt? Yes. Exemptions are made based on the type of property being sold, the use for which the property is purchased, and the identity of the purchaser. You can get a sales tax exemption certificate from the Department of Revenue, which enables a purchaser to make tax-free purchases on wholesale transactions, raw materials, and some professional services of if the purchaser is a federal or state government entity, or charitable nonprofits, religious or educational organizations.
So how do I keep track of all of this? Bush recommends investing in online shopping carts or accounting software, such as QuickBooks, which help calculate your sales tax rate and automate the filing process. Some states give an immediate credit for prepaying estimated taxes in advance. The percentage varies from state to state.
Where Do I File State Taxes?
Your sales tax is filed with the Department of Revenue monthly or quarterly. “The lower the sales volume, the less estimated taxes you have to pay throughout the year,” explains Bush. “The higher your sales volume the more frequently you have to pay, i.e. monthly.”
While it’s important to stay on top of your federal tax obligations, “don’t forget about your state tax. Determine your presence, register with the state, and get a permit,” advises Bush. Working with a tax specialist or an accountant can also help you gain a working knowledge of your state tax obligations and avoid costly mistakes.
Want to learn more savvy business strategies? Take a look at our business resource center. And, one of the smartest business decisions you can make is being proactive about protection. Connect with an agent today to learn about customized insurance coverage for your business.
Neither American Family Insurance nor its agents are authorized to give tax advice. Customers should consult a tax advisor for answers to tax questions.
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