Your Complete Guide to US Sales Tax

• Reading Time: 5 Minutes
• Published: January 7, 2022
• Last Updated: January 14, 2025

Tax compliance is highly essential in tax management and accounting services. Every company must follow the legal regulations to avoid drowning in troubled waters. Firms need to stay updated with changes or modifications in every rule to ensure compliance and timely tax filing. Various kinds of taxes apply to a firm in its dealings. One of the numerous taxes applicable to a company is sales tax. Sales tax might be daunting for start-ups and differ from one state to another. The most confusing aspect of sales tax is whether your business should collect sales tax, on which items, and how much. Since various misunderstandings and disorganization revolves around sales tax, we present a complete guide to answering your inquiries.

What is Sales Tax?

Sales tax involves collecting taxes on taxable items. Every state classifies products and services into taxable or non-taxable and specifies the amount or rate of the tax collection. Firms must collect the tax from customers’ pockets by including it in the invoice and depositing it with the government on time using tax management and accounting services.

It is easy for a brick-and-mortar business to collect and file sales tax from customers to the government as they operate in one location under one state’s rules. However, firms involved in online selling offer their services/ products in various states and areas. Therefore, their tax imposition and collection amount differ everywhere. It makes the sales tax report preparation and filing highly complicated.

You can collect sales tax only after taking due permission from the state. After receiving the permit, the state will specify the filing frequency (number of times you can file sales tax reports, generally monthly, quarterly, or annually) and due dates (deadlines).

Some states impose ‘use tax,’ meaning tax liability when sales tax is not collected. It may happen when firms purchase something from a different state that does not collect sales tax. In such cases, firms must pay use tax to their state authorities. The rate may be the same or different depending upon different states. Businesses must be wary of their states’ tax laws to ensure compliance.

If the basics are clear, let us move forward with a few tips and tricks that influence the management, collection, and filing of sales tax returns through tax management and accounting services.

Sales Tax Differs With States:

In the United States, no federal laws exist regarding sales tax. While forty-five states, including the district of Columbia, collect statewide sales tax, thirty-eight states collect local sales tax. In some cases, local sales tax may be more than statewide taxes. States like Alaska, Delaware, Montana, New Hampshire, Oregon do not impose sales tax, but Alaska allows local sales tax. If you combine state sales and local tax, the top five states with the highest average include:

• Tennessee- 9.53%
• Louisiana- 9.52%
• Arkansas- 9.47%
• Washington- 9.42%
• Alabama- 9.22%

The lowest average states include:

• Alaska- 1.76%
• Hawaii- 4.44%
• Wyoming- 5.34%
• Wisconsin- 5.46%
• Maine- 5.50%

New York has one of the highest state tax 4.52%, and local sales tax, 4%. Firms cannot assume sales tax rules and methods to be the same in every state. Thus they should be diligent in their tax management and accounting services.

Collect Sales Tax if You Have Nexus With The State:

Nexus means connection. If a business wants to collect sales tax from the customers of a particular state, it needs to have a link in the following way:

• A physical location (pop up, showrooms, warehouse, etc.)
• Employees
• Inventory
• Drop-shipping
• Affiliates
• Temporary sales
• Online sales at a significant volume

Apart from the home state, a business can have nexus in additional states. E-commerce companies can collect sales tax from customers per the respective states’ tax rate. However, there are exemptions in collecting sales tax from out-of-state sales until a specific limit to encourage small businesses.

Register Beforehand:

Firms and merchants must register themselves with the state’s taxing authority and gain a sales tax permit before sales tax collection.

Sales Tax From Different Channels:

Today, businesses operate through multiple channels- brick-and-mortar locations, online websites, e-commerce platforms, and social media. However, sales tax collection is a must from all the tracks. Since the customer base is broad, sales tax collection becomes complicated. Financial, tax, and accounting software can help you manage your collection process.

Dependency of Sales Tax States:

Some states follow ‘origin-based’ tax involving sales tax collection from the source of business. Others follow a ‘destination-based’ system wherein sales tax gets collected according to customer location. There are standard rates for eligible products and non-standard for specific items.

Frequency of Filing Depends on Sales Volume:

Every state provides sales filing frequency and due dates. It may be monthly, quarterly, or annually. However, exceptions are always there, and firms may submit semi-annually. Some states may consider sales volume; others might provide a standard. The tax management and accounting services department needs to embrace every possible prospect.

Varied Due Dates for Filing:

While many states provide the 20th of every month as the due date for sales tax filing, some may follow the 25th or last day of the month. In any case, the company’s tax management and accounting services department must know and prepare files accordingly.

File Return Even With Zero Tax Collection:

Firms must file a sales tax return even if the business wasn’t operational and didn’t collect any sales tax amount. Otherwise, it may face penalties.

Sales Tax Benefits to Business:

States understand the difficulties and significance of sales tax collection from customers and encourage businesses by offering them a part of the tax, provided they file their return timely. The tax management and accounting services must help the firm avail these discounts.

Conclusion:

The sales tax collection and reporting process is complex and requires thorough understanding. Firms must ensure they comply with the laws regularly by updating themselves constantly.

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