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Sales tax is a small percentage of tax on a retail sale that’s used to fund state budget items like schools, roads, and public safety. Forty-five U.S. states and Washington D.C. all have a sales tax, and each state regulates and governs sales tax a little differently.

 

We’ve assembled the guidelines below to acquaint small businesses with the five key things you need to know about collecting, reporting and filing sales tax in the U.S.

 

In the U.S., online sellers are only required to collect sales tax from buyers in states where they have sales tax nexus – which is just a legalese way of saying a “significant presence” in the state.

 

While each state’s nexus laws are slightly different, sellers generally have nexus if they have any of the following business activities in a state:

 

 

Check out this map for sales tax nexus information for every U.S. state.

 

If you have sales tax nexus in a U.S. state, that state requires that you charge sales tax when you ship a taxable product to buyers in that state. Keep in mind that most tangible products are taxable, though in some states necessities like clothing or groceries may be tax exempt.

 

Before you begin collecting sales tax from buyers in your state, you are required to register for a sales tax permit. Don’t skip this step. Most states consider it illegal to collect sales tax without a permit!

 

Once you have your sales tax permit in hand, your next step is to start collecting sales tax from all customers in the state. If you only accept payments via PayPal, then you are only required to set up sales tax collection through PayPal.

 

But if you also sell taxable products on other channels, make sure you’re collecting sales tax from buyers on those channels, as well.

 

As an online seller, you may also be required by the state to charge sales tax on the shipping amount you charge your customers. You can see here a list of states that consider shipping charges taxable.

 

When you receive your sales tax permit from a state, you’ll be assigned a sales tax filing frequency.  You’ll usually file your state sales tax return either monthly, quarterly, or annually. As a general rule, the more revenue you make from buyers in a state, the more often the state will instruct you to file a sales tax return.

 

The majority of states want you to break down how much sales tax you collected not just from buyers in the state, but by your buyers’ county, city, and other special taxing district. This can be an incredibly cumbersome and time-consuming task considering that states can have hundreds of taxing jurisdictions.

 

That’s where a sales tax automation solution comes in. Your sales tax automation solution will connect just once with all the channels on which you sell and then break down the sales tax you’ve collected into return-ready reports for all of your sales tax states.

 

Once you’ve determined how much sales tax you’ve collected in each state, county, city and special taxing district your final step is to file your sales tax return.

 

Each state’s taxing authority (usually called the “[State] Department of Revenue”) has a portal where you can file and pay online. Or, if you want to take sales tax completely off your plate, you can also AutoFile your sales tax returns in most states.

 

And that’s it! You’ve mastered the five main keys of sales tax. It will be a whole lot easier the next time a sales tax filing due date rolls around!

 

For more information about sales tax, check out our Sales Tax for PayPal Users guide.

 

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