Here’s the first thing I want every business owner to understand about sales tax: that money isn’t yours. If you’re required to collect sales tax from your customers, you’re essentially collecting it on behalf of a state or local taxing authority. Spend it, ignore your filing deadlines, or fail to recognize that you’ve created nexus in another state, and what started as a simple compliance issue can turn into penalties, interest, and a tax bill you never planned for.
The good news is that sales tax doesn’t have to be complicated once you understand the system. Let’s break it down.
Maybe. There is no blanket rule that says every small business has to collect sales tax. Your obligation generally comes down to two major questions:
If the answer to both is yes, you may be required to register, collect the appropriate sales tax from your customers, file sales tax returns, and remit the money to the state. And remember, sales tax is primarily governed at the state and local level. There isn't one federal sales tax rule that every business in America follows.
That's why a business selling the exact same product to customers in different states can have different sales tax obligations.
This is where a lot of business owners get into trouble. For years, business owners primarily thought about sales tax in terms of physical presence. If you had a store, office, employees, inventory, or another physical connection to a state, you could create nexus there. Physical nexus is still important, but it's no longer the whole story.
Following the U.S. Supreme Court's decision in South Dakota v. Wayfair, states can require certain out-of-state sellers to collect sales tax based on their economic activity in the state, even when the business doesn't have a traditional physical presence there. That's called economic nexus.
Depending on the state, economic nexus can be triggered when your sales into that state exceed its applicable threshold. Those thresholds and how they're calculated vary by state, and states have continued changing their rules over time.
So don't assume, “I don't have an office there, so I don't have to worry about sales tax.” That could be a very expensive assumption. If you're selling products or services across state lines, especially online, you need to know where your business is creating nexus.
Once you determine that you have nexus in a state and you're making taxable sales there, the next step is generally to register with that state's taxing authority before you begin collecting sales tax.
Depending on the state, this registration may be called a:
Don't just start charging customers an extra percentage and call it “sales tax.” If you're collecting sales tax, make sure you're properly registered and authorized to collect it.
Registration procedures vary by state. Some states handle everything directly through their Department of Revenue or equivalent taxing authority, while others may have additional state or local requirements. Once you're registered, the state will generally tell you how frequently you're required to file sales tax returns.
Once you're registered, I want you to think about the process in five steps.
Don't assume everything you sell is taxable, and don't assume everything you call a “service” is automatically exempt.
States can tax:
The rules vary significantly from state to state. Start with what you're actually selling and determine how each state treats it.
If the transaction is taxable and you're required to collect tax, you need to charge the appropriate amount. This can get more complicated when you're selling across state and local jurisdictions because sales tax rates and sourcing rules aren't uniform nationwide. Fortunately, many modern point-of-sale systems and e-commerce platforms can help automate sales tax calculations.
But don't confuse automation with responsibility. You're still responsible for making sure the system is configured correctly.
This is HUGE. Do not treat sales tax you've collected like business revenue.
You may have $50,000 sitting in your business checking account, but if $5,000 of that represents sales tax you've collected and owe to taxing authorities, you don't really have $50,000 available to spend. Your bookkeeping should clearly track:
I also want you keeping exemption and resale certificates when they're applicable. Good bookkeeping makes sales tax compliance dramatically easier. Bad bookkeeping can turn filing a simple return into a nightmare.
Once registered, you'll generally be assigned a filing schedule by the state. Your return reports information such as your sales, taxable sales, exemptions, and sales tax collected during the filing period.
And here's something business owners frequently overlook: if your sales tax account is still active, you may be required to file a return even when you had no taxable sales or tax due for the period.
Don't assume zero sales means zero filing obligation. Check the requirements of the state where you're registered.
Finally, remit the sales tax you've collected by the applicable deadline. This is why I don't want you spending that money in the first place. Collect it. Account for it. File the return. Send it where it belongs.
Build this process into your regular bookkeeping instead of waiting until a deadline to figure out where the money went.
Your filing frequency generally depends on the state and your sales tax activity.
A state may require you to file:
Businesses collecting larger amounts of sales tax may be required to file more frequently, while smaller businesses may have less frequent filing obligations.
But don't choose the schedule yourself. Follow the filing frequency assigned by the taxing authority and pay attention to any notices changing that frequency. Miss a deadline and you could face penalties and interest even though you properly collected the tax from your customers.
Online sales are where this gets particularly interesting. You could be sitting at your kitchen table running an e-commerce business and create sales tax obligations in states you've never personally visited. That's economic nexus.
If your business sells directly through its own website, you need to monitor your sales activity and determine when you cross the applicable economic nexus threshold in another state.
Marketplace facilitator laws have changed the sales tax landscape for online sellers. In many situations, a marketplace such as Amazon, Etsy, eBay, or Walmart Marketplace may be required to calculate, collect, and remit sales tax on marketplace transactions on the seller's behalf. That's fantastic, but don't assume the marketplace automatically takes care of every sales tax obligation your business has.
You may also sell through your own website. You may have inventory stored in another state. You may have employees or other business activities creating nexus. You may also have registration or filing requirements depending on the state and your particular facts.
Understand what the marketplace is handling and what you are still responsible for.
Sometimes, but let's clarify what “exempt” actually means. There are several different situations people tend to lump together.
Your product or service may not be taxable under a particular state's laws.
Your customer may qualify for an exemption, such as a reseller purchasing inventory for resale or an eligible tax-exempt organization.
Or your business may not have nexus in the state, meaning you aren't required to collect that state's sales tax in the first place.
Those are completely different situations. If a customer claims an exemption, get the proper documentation. Don't simply take someone's word for it because they tell you they're a nonprofit or they're “buying it for resale.” If the state later questions the transaction, you want the appropriate exemption or resale certificate sitting in your records.
There are currently five states without a statewide general sales tax:
But don't read that list and automatically assume you have nothing to worry about. Alaska, for example, doesn't impose a statewide sales tax, but local jurisdictions can impose sales taxes. This is exactly why sales tax needs to be analyzed based on where you're doing business rather than relying on broad rules of thumb.
Pay attention here. If you collect sales tax from a customer, don't spend it.
You're collecting money that's supposed to be remitted to a taxing authority. Failing to file returns or remit sales tax you've collected can lead to penalties, interest, collection action, and potentially much more serious consequences depending on the jurisdiction and circumstances. And don't assume shutting down the LLC automatically makes the problem disappear. States can have rules imposing personal responsibility for certain unpaid sales tax liabilities. That's why this is different from simply forgetting to pay an ordinary business bill.
If you discover that you should have been collecting sales tax and weren't, or you've collected tax and haven't remitted it, don't bury your head in the sand. Address it immediately. The problem generally doesn't get cheaper with time.
Sales tax isn’t something you need to be afraid of, but you absolutely need to take it seriously. Know where you have nexus, determine whether what you’re selling is taxable, register where required, collect the correct amount, and file your returns on time. Most importantly, don’t spend sales tax you’ve collected as if it belongs to your business. As your business grows into new states, sales channels, products, or services, your sales tax obligations can change right along with it.
Book a Comprehensive Tax and Business Consultation with my team at KKOS Lawyers before a sales tax mistake turns into a much bigger and more expensive problem. They can look at your business structure, operations, and where you’re doing business to identify tax obligations and other planning opportunities you may be missing. Don’t wait for a state tax notice, penalties, or years of unpaid sales tax to tell you your strategy was wrong. Get ahead of it now, while you still have the opportunity to fix problems before they start costing you serious money.
Possibly. You may have a sales tax obligation if you have physical or economic nexus in a state and make taxable sales there.
Economic nexus is a sales tax obligation created by reaching a state’s sales or other applicable economic threshold, even without a physical presence there.
Generally, yes. If you’re required to collect sales tax, register with the appropriate state taxing authority first.
No. Your obligations depend on where you have nexus and whether your sales are taxable under that state’s rules.
An LLC isn’t automatically subject to sales tax. It depends on where the business has nexus and what products or services it sells.
It depends on the state and the type of service. Some states tax certain services while others do not.
Possibly. States have different rules for software, downloads, subscriptions, and other digital products.
Marketplace facilitators often collect and remit sales tax on marketplace transactions, but you may still have other sales tax obligations.
You could still be responsible for the tax, plus potential penalties and interest. Address the problem as soon as you discover it.
Generally, no. Sales tax collected from customers must be handled according to the applicable state’s rules.