It’s hard to find many things about sales tax that are straight-forward. Each state has it’s own set of laws, rates, and tax code.
All that being said, here are 10 “general rules” of sales tax that can help those of you just starting trying to make sense of sales tax and FBA.
Every state has it’s own tax code. Enough said. Although there are some similarities between states, the fact that there isn’t a uniform set of laws means there’s just too much for a small business to learn.
If you live and operate your business in a state that charges sales tax, then the general rule is you’re required to collect sales tax from customers within your state. How much you’re required to collect is further down the page.
One June 21, 2018, the Supreme Court of the United States allowed states to require sellers with economic nexus to require online sellers to collect sales tax. Find out more about economic nexus here.
The first factor is if the state you’re collecting sales tax in bases its sales tax rate on where the item is being shipped from (origin-based tax rules) or if it’s based on where the item is being shipped to (destination-based tax rules). (It’s a little more complicated than that, even. Read all about Origin-Based and Destination-Based Sales Tax Collection here).
The second factor is the sales tax rate itself. In a lot of states the sales tax rate is a sum of several sub rates like the state rate, a city or county rate, and potentially a special tax (like funding for transportation or education).
Here’s the logic the states use: the more sales tax you collect, the more frequently they want you to pay it. The most frequent filing is monthly, then comes quarterly, and then semi-annually, and the least frequent is annually.
According to TaxJar, here’s the list of states that offer a discount for paying sales tax on time. If you file in one of those states, take them up on their offer. That’s free money!
Unfortunately, none of the states will cut you a break if you don’t file your sales tax return on time. Many will impose both a penalty for failure to file on time and interest on the amount you owe. Some states will even penalize you for not filing what’s called a “zero return” indicating that you don’t owe anything.
Ask any tax professional and they’ll tel you that a sales tax audit makes an income tax audit look like a picnic. In general, states require online sellers to keep records of sales and deductions for at east 3 years. Be sure to consult your state website for their exact record-keeping requirements.
In reality, states are more likely to be aggressive with an online seller who is knowingly not collecting and paying sales tax than the seller that is doing the best they can.