Are You Collecting Sales Tax Correctly?

States regulate sales and use taxes in the US. This means that the states determine:

• whether a product or service is taxable.
• whether you as a seller must collect and remit sales tax.
• whether and when you are subject to use tax.

Each state has different rules, and they often allow cities and other jurisdictions to set their own rules.  (And some states do not collect sales tax at all).

You must consider sales tax when you sell taxable products within a state.  Most products are taxable, but there are exceptions.  Some states carve out specific products such as food or clothes as non-taxable.  Some states tax services, and some states (such as New York) tax software as a service.

Identifying taxable services and products is relatively easy to do if you sell through a physical brick-and-mortar location in one jurisdiction with no online sales.  The sales tax system evolved in an offline world and works best in that situation.

For each location, check with the state department of taxation (the name of which will depend on the state). They will be able to specify the products and rates for your specific location. Your POS system can then automate the collection of sales tax.

Do you have to collect sales tax if you sell Software as a Service (SaaS)?

We call this out specifically because we get a lot of questions about SaaS products. In New York SAAS is taxable, so if you sell such a product and have a nexus in New York you must collect and remit sales tax.

California does NOT tax SAAS. Nevada and Ohio have different rules depending on whether the product is for business or personal use. Tax Jar has a very nice post here complete with a color-coded map to help you sort this out.

This becomes more difficult when you start selling online

If, for example, you have a business in Los Angeles and buyers in New York, are you required to collect sales tax? The answer is, it depends.

The key term here is “nexus.” Once you establish a sales tax nexus in a state, you will collect sales tax for that state.

You establish a nexus by either having a physical location in the state or meeting a sales threshold in that state.

The threshold is often tens of thousands of dollars, so if you sell one or two small items to one or two small customers in a state, you likely don’t have to worry about sales tax.

However, if you start selling significant amounts of products to a state, you should check whether you are creating a nexus.

The rules around nexus are straightforward but voluminous because they vary by state.  Avalara has some great, detailed information on the nexus rules, which you can find here.

If you do have a nexus in a state, you will need a sales tax permit for that state. Tax Jar has a useful resource here that will point you in the right direction for each state.

The state will then assign you a sales tax filing frequency (generally monthly, quarterly, or annually) and sales tax due dates.

If you are an online seller, we strongly recommend using software to manage your sales tax.  A couple of options include Avalara and Tax Jar.  Once you implement one of these solutions, they will monitor your sales, determine where you have a nexus, and manage the filings for you.