Are You Collecting Sales Tax Correctly?

Sales tax in the US is a complicated mess of rules and regulations that vary by jurisdiction.  Use tax adds another wrinkle that businesses should understand.   So here we delve into what sales and use taxes are and when you should start thinking about collecting and paying them. 

The basic idea is that if you sell taxable products, you collect tax and remit the tax to the state. Taxable products are generally tangible products and sometimes services.

You pay use tax if an item is sales taxable in your jurisdiction but you didn’t pay sales tax.

Individuals and businesses pay sales tax when they buy products, but in some cases businesses are exempt or can get refunds on the taxes they pay.

That is the simple explanation.

The complexity comes from the fact that sales tax is regulated by the state. Ecommerce has also made the situation more challenging, since selling across state lines means working with many jurisdictions.

It is impossible to cover every aspect of sales and use tax in a short blog post, but we’ll give you some guidelines and resources to get started.  If you sell anything, it is worth delving into your situation’s specifics to understand when and how you are responsible for sales tax.  

If you need help, contact us here, and we can look at your specific situation. 

Sales and use taxes in a nutshell

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.  

And then there is use tax

Some states also collect “use tax.”

Use tax puts the burden of sales tax on the buyer of the goods.  Depending on the state, individuals and businesses may be required to pay use tax. 

Here is how use tax works: if you are subject to use tax, then if you buy goods from an out-of-state seller that does not collect sales tax in your state, you pay the tax yourself.  The use tax rate can be the same as the sales tax rate, or it can be different. You will have to check your local rules.  

For example (how sales and use taxes work): 

Say you buy a $1,000 piece of equipment from another state, and your state has an 8% sales tax and 8% use tax.   

If the supplier has a nexus in your state, they will charge you the 8% or $80 at the time of purchase and remit the payment to the state.  

If the supplier does not have a nexus in your state, they will not charge you.  That is when the use tax kicks in: you will submit a use tax return to the state, declare the purchase and pay the $80 in use tax.  

Businesses and Sales Tax

Businesses pay sales tax on the products that they purchase, but also qualify for some exemptions.

For example, in most cases, retail businesses do not pay sales tax on wholesale products that they buy. Some not-for-profit businesses and schools may be completely exempt from paying sales tax.

The rules depend entirely on your location and can be very complex. In one case that we know of a minor league baseball team installed a digital scoreboard. If they called it a scoreboard they would have had to pay sales tax on the installation. But by declaring it was primarily for advertisement they avoided paying the tax.

It is almost impossible to know all of the rules and for this reason, businesses often get this wrong. If you own a business and are paying a significant amount of sales and/or use tax it may worth your while to hire a professional to review your sales tax expenditures and claim refunds. This is not something we do at Rosenberg Chesnov, but we can recommend someone if you are interested, just contact us here.

To Summarize

Sales and use tax require patience and sorting through many pages of rules and regulations.

Just remember these three things:

  1. If you sell products and meet the economic presence (or nexus) rules you will have to collect and remit sales tax.
  2. If you live in a state with sales tax but don’t pay it, you may be subject to use tax.
  3. Professional help is worth it. Software and sales tax services can keep you compliant.

Would you like some help? 

If you are a client and would like to book a consultation, call us at +1 (212) 382-3939 or contact us here to set up a time.

If you aren’t a client, why not? We can take care of your accounting, bookkeeping, and CFO needs so that you don’t have to worry about any of them. Interested?  Contact us here to set up a no-obligation consultation.

Stay informed

Interested in receiving updates in your mailbox? Check out our newsletter, full of information you can use. It comes out once every two weeks and you can register for it here:

Sales Tax FAQs

What is sales tax nexus

?A sales tax nexus is a presence in a state that requires you to collect and remit sales tax. You establish a nexus in a state by having economic activity in that state.  Opening a location in that state establishes a nexus.  Selling into a state without a location can also establish a nexus.  All states have rules regarding establishing a nexus.  There is a threshold, often around $100,000 – once you pass this threshold, you have established a nexus and are then subject to the sales tax rules in that state.

Is Software as a Service (SaaS) taxed?

This depends on the state.  In New York, software as a service is taxed. In other states, it is not.  Implementing sales tax software can help you manage establishing a nexus and keep you compliant with the law. Tax Jar has a very nice post here complete with a color-coded map to help you sort this out.

How do I register for sales tax?

This excellent blog post by Tax Jar explains how to register for sales tax in every state that requires it. 

Our Latest Posts: