Does your business need to collect sales tax and remit it to the state or local tax authority? And if it does, how do you go about getting a sales tax license? Moreover, what if your business is selling your products across state lines? Do you need to charge and remit sales tax in those states, too?
These are all valid and important questions! We’re going to delve into them in this article to give you some helpful food for thought as you research what requirements apply to your business.
Please keep in mind that all I share here is for discussion purposes. For professional tax guidance, talk with a certified tax advisor or accountant.
How Does Sales Tax Work?
Sales tax is a tax paid to the state (and sometimes local) government authority for the sales of certain tangible goods and certain services. In most states, the law allows businesses that sell the products or services to collect sales tax funds from their customers at the point of purchase. Then, those businesses must report and pay those collected funds to the state. Sales tax is a pass-through tax, meaning that businesses do not mark up the tax amount and profit from it. The tax that they collect is what they must report and pay.
- Forty-five states and the District of Columbia levy general sales taxes, which apply to nearly all tangible products and some services.
- 37 states also allow sales tax at the local level (this includes Alaska, which has no state tax)
- Many states have special sales tax rules for tobacco products, alcohol, and motor fuels.
Typical exemptions from sales tax in many states include:
- Food purchased for use at home (as opposed to food bought for immediate consumption, like at a restaurant)
- Prescription and nonprescription drugs
- Professional services, such as accounting, legal, medical, marketing (although tax is usually applied if selling print brochures, direct mail postcards, etc.)
What is a Sales Tax License?
A business selling products and services that are subject to sales tax will need a sales tax license. Some states refer to it by other names such as seller’s permit or sales tax permit.
A business must apply for a sales tax license to be authorized to collect sales tax from customers and remit those dollars to the state (or local tax authority) to which it’s due.
States issue sales tax licenses so that they can monitor the collection, reporting, and payment of sales tax. Businesses are assigned a sales tax number or permit number when they receive their sales tax license.
In some states, temporary sellers (such as those that operate around holidays or at events, like Independence Day fireworks retailers or rummage sale operators) must obtain a temporary seller’s permit.
What is the Difference Between a Sales Tax License and a Resale Certificate?
A Sales tax license identifies businesses that sell taxable goods and services on a retail basis. A resale certificate may go by different names in different states. Several alternate names include “resale permit,” “wholesale certificate,” “reseller’s permit,” “nontaxable transaction certificates,” “sales tax exemption certificate,” and “sales and use tax resale certificate.”
Again, the name doesn’t really matter. A reseller license (resale certificate) gives a business permission to sell taxable products on a wholesale basis to retailers without collecting sales tax. The understanding is that the retailer will be collecting sales tax from its customers and remitting it to the state.
Note that some states use “sales tax certificate” as “resale certificate” interchangeably. This can get a little confusing. For this article, the term “resale” and “reseller” will refer to selling on a wholesale basis.
Often businesses with a reseller permit will also have a sales tax license. However, that’s not necessary all the time. Manufacturers that only sell components for other products typically do not collect sales tax and may not need a sales tax license from the state.
Do You Need a Sales Tax License in Every State Where You Sell Products?
When a business has “nexus” in a state, it must obtain a seller’s permit (if the state or local government levies a sales tax). Having a physical presence—such as an office, store, or warehouse—in the jurisdiction establishes nexus. However, economic activity without a physical presence might also constitute a nexus.
With the Supreme Court ruling on the South Dakota v. Wayfair case, states may mandate out-of-state businesses to collect and remit sales taxes when they have more than 200 sales transactions or $100,000 of sales within the state annually. (Note that some states have enacted their own threshold levels.)
Nearly every state has enacted nexus laws that affect remote sellers, including online marketplaces. The Tax Institute provides an up-to-date Remote Seller Nexus Chart. They’ve also created an Economic Nexus State Guide that explains the thresholds that determine economic nexus in each state.
Note that remote seller nexus comes in various flavors. A state may address one or more in its laws to require businesses that meet the criteria to register to collect and remit sales tax:
- Click Through Nexus – When an out-of-state business contracts with an in-state individual or entity that refers (either directly or indirectly) potential customers to the out-of-state business through a web link to receive a commission or other compensation when a sale is made.
- Affiliate Nexus – When an out-of-state business’s employee, agent, or person otherwise affiliated with the out-of-state company has a physical presence in the state.
- Marketplace Nexus – When an online marketplace has its e-commerce infrastructure, customer service center, marketing operations, and payment processing services in the state. In this scenario, the marketplace operator has to obtain a seller’s permit and collect and remit sales tax rather than the individual sellers that use the platform to sell products in that state.
Be aware that businesses that sell taxable products in states where it doesn’t have nexus must inform their customers. States have been becoming more sensitive to out-of-state businesses getting an unfair competitive advantage. Think about it; for example, let’s say customer Lena Smith can buy an item sales-tax-free by ordering it from a seller in another state. But if she buys that same item from the store down the street, she has to pay six percent sales tax. Suppose that item costs $500 before tax. Lena might find it pretty appealing to order from the out-of-state seller so that she can save $30.
To level the playing field, many states and local agencies levy a use tax (usually equal to the sales tax in their jurisdiction). If an individual or business entity buys a taxable product from outside of its taxing jurisdiction– and the seller did not collect sales tax–the buyer must report and pay a use tax for the storage, use, or consumption of that item.
Before You Apply for a Seller’s Permit
Before I discuss how to get a seller’s permit, here’s a checklist of some things you may need to have in order first.
- Obtain an EIN (Employer Identification Number) – This is a nine-digit number issued by the IRS for tax and other reporting purposes. CorpNet can apply for an EIN on your behalf.
- Determine the NAICS Codes for the types of taxable products and services you sell – NAICS stands for North American Industry Classification System. It’s used by government agencies to collect and analyze statistical information about the business economy in the United States.
- Information about your business – Examples of the usually-required details include:
- Business name
- Business entity type
- State of incorporation
- Physical business address
- Email address
- Business phone number
- Business description
- Responsible party
- Bank account information
- Other information, as requested by the state or local tax authority.
- Calculate the amount of tax you expect to collect. – The state will determine your filing frequency based on your estimate.
- Provide the names of your suppliers.
- Personal references – Some states may ask for the names and addresses of people who can attest to your sense of responsibility and reliability.
How to Get a Sales Tax License
States usually have their seller’s permit applications available online. Visit your state or local tax authority’s website to find details about how to get a sales tax certificate and for rules about the collection and remittance of sales tax. You may also request seller’s permits through tax authorities’ offices. The amount of time it takes for states to issue sales tax licenses varies. The filing costs vary, as well. In some states, like Florida, seller’s permits are free when ordered online. Others charge a fee, which can range from $10 (like in Rhode Island) to $100 (like in Connecticut). Some states require that businesses renew their sales tax certificates every one to five years.
After receiving a sellers permit, businesses with a physical location in the state must display it in a conspicuous place where it can be easily seen. Remote sellers and online businesses must follow the state or local tax authorities’ rules that apply to them.
Collecting and Paying Sales Tax
Sellers typically collect the sales tax at the time that a customer buys the product or service. The percentage of each sale that a business must collect and remit varies by state and local tax authority.
The business then uses the appropriate form to report sales tax collected and sends it to the state (or local tax agency) along with a payment that matches the sales tax dollars reported. Businesses may need to file sales tax forms monthly, quarterly, or annually—depending on the state or local tax authorities’ rules and the amount of sales tax the business collects.
How CorpNet Can Help
If you fail to obtain a sales tax license or collect and remit the sales tax you’re responsible for, you could face fines and penalties. CorpNet can make sure you stay compliant and in good standing with the state and local tax agencies!
We can research the sales tax licenses and resale certificates that you need for your business. Also, we can help you register for sales and use tax to ensure you get your seller’s permits as quickly as possible.
Contact us today for a free consultation to talk about your next steps!