How to Handle Sales Tax As a New Business Startup
Sales taxes can be an overwhelming topic for small business owners. Depending on your state laws and whether your economic activity warrants it, it may be mandatory to collect sales tax from customers.
Complying with sales tax laws in your locality is crucial to running a successful business, and taking a few simple steps can keep you compliant and help to prevent fines.
Check Your State’s Laws
Collecting, calculating, reporting and paying sales tax can be one of the more complex parts of running a small business. Staying abreast of legal changes that affect sales tax can make this task particularly daunting; according to the Small Business Administration, inquiries related to sales taxes from small businesses remain among its most frequently received queries.
Most states impose sales taxes on goods and services purchased, though taxation rules vary between states based on product category or customer location.
Some states also impose laws mandating marketplace facilitators like Amazon and eBay to collect sales tax for retailers who sell through their platforms, with requirements such as how often filing and paying sales tax must occur differing by state. Furthermore, certain states mandate keeping records of sales tax collected – something often required during an audit.
Set Up a System to Collect Sales Tax
Before beginning sales tax collection, it’s essential that a system be put in place to document and record it. You also must know when your state requires reporting and remitting of sales taxes collected.
Decidng whether you have sales tax compliance obligations comes down to “nexus.” Nexus refers to the commercial connection that makes you liable for sales tax in a particular state. Definitions vary across states, but could include where your office (even if home-based) or warehouse/distribution centers are located and whether or not contractors or employees work there.
An experienced tax accountant or CPA can be invaluable in navigating these arduous regulations, from finding suitable software to track and document your taxes to helping determine deductions available to you – not complying with sales tax laws can incur steep fines.
Keep Records of Every Sale
Once you begin collecting sales tax, it’s essential that you maintain meticulous records. This includes journal entries showing how much money was received from each sale plus its associated sales tax payment; furthermore purchase records will allow you to establish costs associated with goods sold.
Understanding which state, community and product regulations apply is also crucial for successfully conducting business in any given location. Knowing these will allow you to assess what tax rate to charge customers as well as whether taxable products exist and any applicable exemptions exist.
Sales tax complexities can often cause havoc for small business owners. Consulting a sales tax professional or consulting with a mentor from SCORE or SBDC may be worth investing in to avoid costly legal tangles; depending on your state, criminal penalties for not paying sales tax could even include prison time and significant fines against you and/or your company.
Pay the Sales Tax
Many states have complex rules on how to calculate sales tax for online purchases, particularly online sales of digital products such as software and staffing services. Some use origin- and destination-based calculations while others have specific guidelines regarding digital sales tax calculations.
Sales taxes typically apply to consumer products like clothes or food; however, states often tax services and certain professions. When starting up a new business venture, be sure to contact both your local and state government to find out which items and services fall under sales tax and whether there are any special exemption requirements or requirements that should be met in order to comply.
Sales tax laws can be extremely complex, and any misstep could result in fines or criminal charges. To make managing state sales tax compliance simpler and avoid these pitfalls altogether, use automated solutions like Shopify, Square, Clover or PayPal with built-in automation to manage state sales tax compliance – these systems integrate easily with accounting software making compliance management straightforward; just remember to keep accurate records of collections and remittances should the state audit your operations!
