Now that taxes are still fresh on the minds of many small business owners, I figured it would be a good time to write a post on sales tax for online businesses. Countless small online business owners may be uninformed when it comes to properly recording, collecting, and paying state sales taxes on their online sales. Unless your online business is registered and/or selling within the states of Alaska, Delaware, Montana, New Hampshire, or Oregon, there is a good chance that you are conducting taxable transactions and this can prove to be a costly mistake- especially as cash-strapped states seek ways to cover their budget shortfalls.
If you are operating your business online, then here are five things you should know about recording, collecting, and paying state taxes:
1. The sales tax landscape is complex. Currently, there are more than 11,000 tax collection districts in the U.S. (that’s including various cities and counties, each with their own local tax rate), so determining and collecting sales tax on your online transactions can get tricky. For this reason, it is vital that you seek out professional advice on how to pay off your state sales tax obligations. This may mean asking a qualified accountant or tax attorney or consulting with informed members of your state’s Department of Revenue (you just may have to work a bit to find those “informed members”).
2. Register your business with your local Department of Revenue. Assuming that you already have a Federal ID number for your business, the first step in reporting and paying your state sales tax is registering your business with your state’s Department of Revenue. After doing so, you will receive a state sales tax permit which will allow you to begin collecting sales tax from your customers.
3. For multiple locations, use accounting or tax software. If you are selling in multiple locations, you need to calculate the correct sales tax for each location. This includes any cities or counties within your state that have distinct tax rates as well as taxable sales in other states. To assist you in this complicated process, you should use a good accounting software program, such as QuickBooks, which will generate up-to-date sales tax information and calculations.
4. Some transactions are exempt. Many online transactions are exempt from sales tax, but you will need to do your research because the definition of what qualifies and when will be different across state lines. Some examples of exempted transactions include: sales to resellers, food sales, and transactions where the buyer is located out-of-state.
5. Keep accurate and clear records. Though the enforcement of paying state sales tax obligations has been lax up till now, as I mentioned above that may be changing because so many states are hurting for cash. There has also been an initiative, that has been gaining traction as of late, for the establishment of a unified online sales tax system. You can read more about it here.