Each State creates Its Own Sales Tax
The definition of sales tax is the tax levied on products sold within the United States.
Over 40 states and Washington D.C have their own individual sales tax regulations out of the total 50 states.
On top of it, over 38 states have local taxes that need to be considered. For online sellers, the tax is applied based on origin and destination.
Origin-based sales tax rate refers to applicable tax according to your business location while destination-based sales tax factors in the location of the customer.
States with origin-based taxes for businesses based from home include Arizona, California, and many more while destination states include Arkansas, Idaho, and New York.
You Only Need To Charge Sales Tax Where You Have A Nexus
Defined as the commercial connection of your business to the state, a nexus requires you to register for sales tax wherever your business resides.
It could be simplified as the physical presence of your company, which requires you to pay sales tax within a state.
For example, if you have an online store in addition to a brick and mortar, this is your nexus. Do note, if you have a physical store in one state and warehouse in another, you’ll need to pay sales tax in both of the locations.
For an office or storefront to be considered a nexus, it should meet the following criteria.
- Owning or renting an office or warehouse
- Having employees
- Having a mailing address
- Maintaining stores with inventory
- Having affiliates
Not All Products Are Taxed Equally
Every state has its taxation norms for different products and if you have multiple products, sales tax will most likely differ for each.
Just to provide some figures, in Arkansas, groceries are taxed at 1.5% while in Arizona and California, there is no sales tax on convenience store items. In Idaho, car tax is 6% as opposed to 0.5% in Oregon.
If you’re a boutique owner, Connecticut will charge you a luxury goods tax on items above $1,000.
New York has a lower tax threshold as clothing priced above $110 is subject to taxation.
In short, an item that might be taxed in one state might not be taxed in another.
Therefore, make sure you check the sales tax of goods and services by state.
Filing Deadlines Can Vary
It’s important to keep in mind that each state has different deadlines for sales tax in addition to different sales return intervals.
Typically, filing for sales tax is done monthly, quarterly, or at the end of the taxable year.
The rule of thumb is that the revenue you earn from selling products in a state is directly proportional to the number of filings you need to complete within that state.
Business owners with nexuses in multiple states should factor in the discrepancy in intervals and according to the state.
For example, some states want business owners to file by the 20th each month while others alter the deadline to the end of the month.
Sales Tax Discounts Are Available
Did you know that over 26 states provide discounts on the sales tax you’ve paid? Here are a few examples of states who offer this:
- Arkansas allows you to keep 2% of the tax on up to $1,000 per month when paid before the due date, as the collection fee
- Georgia allows you to claim up to 3% of the initial $3,000 on due tax plus 0.5% on the additional amount
- Texas allows you get 0.5% on the taxable amount in addition to 1.25% on prepaid sales tax
How To Work With Sales Tax On Invoicing Software?
When it comes to billing, you can reduce the hassle of creating, calculating, and maintaining endless tax accounts by simply using accounting software.
Here are the top accounting tools with the best sales tax features:
Calculating the sales tax automatically while ensuring all data like timestamp, geographical location, item or service, and customer is easy to manage using QuickBooks.
It can help you with product categorization and generation of sales tax liability reports too.
With this tool, you can customize taxes by modifying the default taxes of 0% or utilize the sales tax lookup when creating an invoice.
It also lets you select the tax rate for each item.
Ideal for business owners who require a sales tax summary report, FreshBooks can be used for adding multifaceted taxes such as HST, GST, VAT, and ABN along with your government ID.
To sum it up, when it comes to the meaning of sales tax, charges levied by the government on the goods and services sold by your business depend on factors such as the origin of your business and destination of your customer.
Other critical factors come into play like the state, item, and size of the sale.
Most importantly, businesses can evade liabilities and get discounts by keeping track of filing deadlines.
So, Lighten the admin workload and invest in accounting software today.