Sales Tax for Small Business
So… you’ve started a little home-based business during lockdown?
Maybe you’re sewing masks and selling them online or you’re creating inspirational greeting cards or making delicious home-made jam… or you’ve found some other creative way to turn your talents or hobbies into a viable business. We’d love to hear what you’re up to. Let us know in the comments below.
Starting a small business seemed like a great idea until this little thought dawned on you…
Sales Tax Filing… Aaaargh!
Yep, you can’t sell goods, online or offline, without filing a tax return and learning complex terms like economic nexus, so let’s get you up to speed.
Unless you’re an Accountant, this is probably not the most fun subject for you, so I’ll do my best to keep it simple. Let’s start with the absolute basics.
What is Sales Tax?
Sales Tax is the tax levied by the State and/or Government on certain products or services.
Some governments and some States in the USA levy sales tax and others are sales tax havens.
Selling Goods or Services Online
As an online seller, it’s very important to familiarise yourself with your local tax rates as you will need to collect sales tax from your customers in order to be compliant.
Bear in mind that some states, such as Oregon or Alaska, are sales tax exempt, meaning they don’t levy sales tax.
And some goods, such as foods, are often tax-exempt, even in they are sold in areas that levy tax.
On the other extreme, you might live in a town or city that levies extra sales tax. In California, for example, where the state tax is 7.25%, some local districts impose an additional sales tax.
What is Physical Nexus?
Physical Nexus is a legal term for physical presence, such as an office, store or warehouse.
If your small business has a physical nexus in a state that levies business sales tax or you simply live in the State, you’ll have to collect sales tax from customers in that state and pay it over to the state.
Generally, if you don’t have a physical presence in the state, you don’t have to collect sales taxes on online sales. e.g. If you live outside of the USA or you live in a State that is tax-exempt.
Unless economic nexus applies.
What is Economic Nexus?
Economic nexus applies to online sales.
There was a Supreme Court ruling on 21st June 2018 known as the Wayfair Ruling, which made it possible for any US State to request that online retailers collect and pay sales tax.
But don’t stress, for a small business, sales tax is unlikely to be levied, as this bill was targeting large online retailers.
The new law states that Sales Tax Nexus can be applied even if you don’t have a physical presence in the State but are making $100,000 in Sales or making 200 sales annually (known as economic presence) in that State.
Mostly, you’ll only have Nexus if you live in a State or own a property in that State and the law won’t affect you unless you’re doing loads of business there.
This would probably be a good time to let you know that this post was sponsored* by Tax Connex, a company focused on helping you “eliminate your sales tax burden, no matter how many states you’re in or how often regulations change”.
Please contact Tax Connex if you need tax help rather than me. Hehe.
*Sponsored posts are one way I earn money blogging. All opinions are my own.