A Complete Guide to Sales Tax For Small Business Owners

January 4, 2023

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There are two certainties in life that you cannot escape: death and taxes.

Business owners, no matter how big or small, must pay taxes when selling their products and services. It’s an inevitable part of running a business. One such unavoidable cost is sales tax, and for many small businesses, it can be overwhelming to figure out how to handle it properly.

Generally speaking, sales tax applies to tangible goods sold within a state but this can also include specific services like professional services, repairs and installation services. Some states also require digital items like streaming or downloadable content to be taxed as well.

Depending on where you live, sales tax rules may vary significantly, so it’s important for every small business owner to familiarize themselves with their local laws when it comes to taxation.

To assist you in this discovery process, we’ve created this guide covering all essential information about sales tax and a few ways to handle it properly.

Let’s get started with the very basics.

Contents

When is Your Business Exempt from Sales Tax?

Streamlined Sales Tax: How Critical is it to Your Business?

Difference between VAT & Sales Tax

Sales Tax Formula

Sales Tax Rate by State

Sales Tax Software with Automation Features for Small Businesses

How to record sales tax payable in QuickBooks?

QuickBooks Sales Tax Adjustment

Use PayTraQer with Quickbooks to Automate Your Sales Tax Compliance

What are the main 3 types of taxes?

Which states do not charge sales tax?

Which states has the highest sales tax?

Are there any items or services that are exempt from sales tax?

Is VAT the same as sales tax?

How much is sales tax in UK?

What is Sales Tax?

Sales tax is the fee charged to consumers when they purchase goods and services; and businesses are responsible for collecting sales taxes from their customers as well as remitting them to the relevant government body where a sales transaction has occurred.

While it may sound like an added expense and a complex task, failing to comply may result in hefty fines imposed on businesses. Also, sales taxes play a critical role for sustaining local and state governments.

Generally, most items are subject to sales tax. However, there are some exemptions to sales tax depending on the type of product being sold or its value in certain states or municipalities.

When is Your Business Exempt from Sales Tax?

Sales tax is not applicable to businesses which do not have a “nexus”.

Nexus is the vital connection between a taxpayer and their state, granting authority to tax within its bounds. Without sales tax nexus, states would be unable to collect taxes from those who are subject to them.

Before the monumental decision in South Dakota v. Wayfair by the supreme court in 2018, it was required for businesses to have a physical presence in a state to establish a nexus. However, post the Wayfair decision, businesses are required to pay sales tax despite their physical presence in a state after reaching a certain sales threshold.

For most states this sales threshold or nexus is $100,000 or 200 transactions.

There are few states which have a higher sales tax nexus such as Alabama ($250,000), California ($500,000), Mississippi ($250,000), New York ($500,000 and 100 transactions), and Texas ($500,000).

You also have states such as Alaska, Delaware, Montana, New Hampshire, and Oregon where there is no sales tax applicable.

So if your business does not have sales worth $100,000 or above, or if you’re selling your products & services in states where there is no sales tax, then you’re exempt from sales tax.

You can also avoid sales tax when you have a resale certificate.

A resale certificate ensures that you don't have to pay sales tax when purchasing materials necessary for creating the products your company sells.

For instance, those who own clothing stores don't need to worry about paying sales taxes on fabric they purchase in order to make apparel - their customers foot the bill instead via retail sale tax once they buy the final product.

Streamlined Sales Tax: How Critical is it to Your Business?

Streamlined Sales Tax (SST) simplifies complex tax collection and administration for retailers and businesses selling across multiple states. With SST, companies can maximize efficiency in their sales process without having a physical presence in each state where transactions occur.

SST was introduced in 2000 by National Governor’s Association (NGA) and the National Conference of State Legislatures (NCSL) and it has 25 member states.

Sadly, not a lot of business are aware of this state-run program and the benefits that sellers can gain. Here are some of the benefits you can experience as a business:

  • State level administration of sales and use tax collections.

  • Uniformity in the state and local tax bases.

  • Uniformity of major tax base definitions.

  • Central, electronic registration system for all member states.

  • Simplification of state and local tax rates.

  • Uniform sourcing rules for all taxable transactions.

  • Simplified administration of exemptions.

  • Simplified tax returns.

  • Simplification of tax remittances.

  • Protection of consumer privacy.

As a volunteer seller, there is also an additional benefit . The state provides compensations for CSPs (Certified Service Providers) to help get your Certified Automated System (CAS) up and running - seamlessly integrate it into your existing system, quickly calculate the taxes due and filing returns effortlessly as well taking care of any remittance needs.

Here are the 23 members states of the SST.

  • Arkansas

  • Georgia

  • Indiana

  • Iowa

  • Kansas

  • Kentucky

  • Michigan

  • Minnesota

  • Nebraska

  • Nevada

  • New Jersey

  • North Carolina

  • North Dakota

  • Ohio

  • Oklahoma

  • Rhode Island

  • South Dakota

  • Utah

  • Vermont

  • Washington

  • West Virginia

  • Wisconsin

  • Wyoming

Difference between VAT & Sales Tax

You may sometimes choose to offer your products and services outside the US. In such scenarios, you need to understand what Value-added Tax (VAT) is and how it is different from the Sales Tax charged in the US.

Here are a few quick pointers explaining the difference:

Value-added tax, also known as VAT, is a type of indirect tax used in many European countries around the world.

Sales tax is used by many US states and localities.

The rate of VAT varies by country but typically ranges from 5% to 25%.

US businesses don't have to deal with the burden of a national sales tax - each state sets its own rate which can differ from as low as 2.9% up to 7.25%.

VAT differs because each stage of production incurs a tax.

In contrast, sales tax in the US is collected only once at the sale of the final product.

Businesses can claim a credit for taxes paid at previous stages when reselling products.

In the US, resellers use resale certificates for an exemption from paying sales tax.

To summarize, value-added tax and sales taxes have some similarities but also important differences such as taxable rate levels, when taxation occurs within production/distribution chain and how resellers are taxed for goods purchased for resale purposes.

Understanding these nitty gritty sales tax regulations can be tricky so getting help from experts or leveraging a skilled bookkeeper is highly recommended for any small business owner out there!

How To Calculate Sales Tax in The US

Calculating sales tax accurately seems like a straightforward process.

Let's take an example of an item priced at $100 with a 7% sales tax rate. This means that you would need to multiply $100 by 0.07 (the decimal form of 7%) to get the amount of sales tax collected, which works out to be $7 in this case. When added together with the original cost of $100, this brings us to a final price charged to the buyer in this instance: $107.00.

However, though it may sound simple on paper, in real-time there are many complex scenarios where businesses need to use appropriate formulas & methods to calculate sales tax.

Let’s look at the standard sales tax formula applicable to most businesses.

Sales Tax Formula

The standard formula to calculate sales tax is:

Sales Tax = Net Price X (Sales Tax Rate/100)

The formula to calculate the final price of product with sales tax is:

Final Price = Net Price + Sales Tax Amount

Let’s put these formulas to action with two different examples.

Suppose a business is operating in Alabama and the state charges an average sales tax of 9%, what would be the selling price of a $150 product?

Quickbooks Sales Tax Due

As you can see, the final product price is $163.50.

Likewise, you can calculate the final product price with sales tax for any of your products using the above formulae.

It’s best to use sales automation software such as QuickBooks which will automatically calculate the sales tax for all of your sales. We will look it in just a bit.

In the mean while, you can use the sales tax calculator below for a quick calculation.

Sales Tax Rate by State

The sales tax landscape in the United States can vary greatly from state to state -- with five states forgoing a statewide rate altogether. However, many municipalities still collect their own taxes on top of any existing rates making overall percentages higher than expected.

The table below outlines every US jurisdiction's average total sales tax rate based on current local conditions; Alaska has its own unique entry as it only allows municipal-level taxation but no overarching policy at the moment.

State

Average Sales Tax

Alabama

9.22%

Alaska

1.76%

Arizona

8.40%

Arkansas

9.51%

California

8.68%

Colorado

7.72%

Connecticut

6.35%

Delaware

0%

District of Columbia

6.00%

Florida

7.08%

Georgia

7.32%

Hawaii

4.44%

Idaho

6.03%

Illinois

8.82%

Indiana

7.00%

Iowa

6.94%

Kansas

8.69%

Kentucky

6.00%

Louisiana

9.52%

Maine

5.50%

Maryland

6.00%

Massachusetts

6.25%

Michigan

6.00%

Minnesota

7.46%

Mississippi

7.07%

Missouri

8.25%

Montana

0%

Nebraska

6.94%

Nevada

8.23%

New Hampshire

0%

New Jersey

6.60%

New Mexico

7.83%

New York

8.52%

North Carolina

6.98%

North Dakota

6.96%

Ohio

7.23%

Oklahoma

8.95%

Oregon

0%

Pennsylvania

6.34%

Rhode Island

7.00%

South Carolina

7.46%

South Dakota

6.40%

Tennessee

9.55%

Texas

8.19%

Utah

7.19%

Vermont

6.24%

Virginia

5.73%

Washington

9.23%

West Virginia

6.50%

Wisconsin

5.43%

Wyoming

5.33%

Sales Tax Automation

Thanks to the advancement in financial technology, a lot of small business owners can save time and resources through sales tax automation.

Sales tax automation refers to the use of specialized software designed to ease the burden of managing sales tax compliance. It helps streamline the process of calculating, collecting, and remitting taxes owed on taxable transactions.

This can save time and resources for small businesses owners by ensuring that all due taxes are accounted for and remitted correctly.

Here are a the 3 benefits of sales tax automation:

  • Speed and Accuracy: Tax laws vary by state or jurisdiction, so it’s essential that a business has access to up-to-date rules, regulations, and exemptions when it comes to calculating sales tax obligations. With automated solutions, this information is already embedded into the software, allowing businesses to easily configure their system based on their own specific needs. The accuracy and speed at which sales tax automation can be accomplished is possible through the integration of specific tax information into the software.

  • Power and Control: The power behind these systems lies in their ability to automatically detect different types of products or services being purchased and then adjust rates accordingly. Businesses can also have full control over what products are considered exempt from taxation or not subject to certain state taxes. Automation allows for detailed tracking capabilities so businesses can ensure they’re accurately collecting applicable taxes from customers. This reduces mistakes and ensures accuracy in reporting for audits or potential disputes with taxing authorities down the road.

  • Forms and Templates: In addition to providing accurate calculations, automated systems also offer features such as pre-filled forms for filing returns with the necessary agencies. These forms are populated automatically using data collected during transactions, eliminating manual entry errors while ensuring correct filing deadlines are met on time every time. Automation also simplifies multi-state filings by allowing users to manage multiple locations as one entity rather than having separate accounts for each state they operate in - a great benefit for businesses that sell across various states or countries with varying tax requirements.

Sales Tax Software with Automation Features for Small Businesses

It can be a challenging task to create your own sales automation software or use advanced spreadsheet mechanisms to automate your sales tax compliance and remittance.

Instead you can use sales tax software to get your jobs done.

Sales Tax compliance software provide a comprehensive solution that helps businesses keep updated of their local and federal requirements so they can accurately collect taxes from customers - no matter how many markets are being served.

These streamlined tools are designed to facilitate every aspect of transaction management; meaning customer support teams, accounting personnel and e-commerce administrators have access to everything needed for successful taxation filing processes across multiple industries.

With that said, here are the top 6 sales tax software that you should take advantage of.

  • QuickBooks

  • Avalara

  • Proseries Tax

  • 123Sheets

  • TaxJar

  • Vertex

Sales Tax in QuickBooks

Quickbooks is by far the best financial software for small business owners.

QuickBooks takes the guesswork out of sales tax with automated calculations. When you add a sales tax to an invoice in QuickBooks, the software automatically applies the correct rate based on the date, location, type of product or service, and customer.

Product categorization is also taken into account so that the right amount of tax is applied to each transaction.

The first step to setting up sales tax in QuickBooks is ensuring your products are categorized correctly. This ensures that taxes are applied properly, as tax rates and rules can change from state to state.

Once products are classified correctly, QuickBooks makes sure that taxes associated with each sale are calculated correctly according to their category and location.

Sales Tax Calculator

Sales tax information can be monitored any time directly within QuickBooks. Business owners can view reports which show amounts collected from customers, total taxes due for remittance, payments received or sent out – all conveniently located within one dashboard.

This provides clarity and convenience when it comes to keeping track of how much money needs to be paid or refunded to/from customers and government agencies accordingly.

You can also pay attention to filing deadlines when dealing with sales taxes in QuickBooks - failure to file on time may result in penalties being imposed by taxing authorities. If your business is registered in multiple states they must make sure they file returns according to deadlines set by each jurisdiction they operate in – this includes payment timelines as well as reporting dates.

Overall, managing sales taxes through QuickBooks is beneficial for small businesses because it helps them simplify the otherwise complex process of calculating and filing sales taxes accurately and on time.

With its automated calculations, product categorization features and convenient reporting capabilities, businesses can rest assured knowing that their sales taxes will always be managed correctly without having to worry about mistakes or missed deadlines due to manual errors.

How to record sales tax payable in QuickBooks?

Quickbooks Sales Tax Recording

To record sales tax payable, you can

  1. Choose Taxes, then select Sales tax.

  2. Select the tax agency from the Sales Tax Owed list, use our Record Tax Payment to select the tax agency you're recording the payment for.

  3. From the Bank Account dropdown, select the account you're making the payment from.

  4. Select the Payment Date.

  5. Enter the tax payment amount in the Tax Payment field.

  6. When you're ready, select Record Tax Payment. If you need to print a check for the payment, check the Print a Check checkbox and then select Record Payment and Print Check.

QuickBooks Sales Tax Adjustment

QuickBooks also makes it easy to adjust sales tax.

If you need to make an adjustment, select Make Adjustment when you record a sales tax payment. Use this when you need to decrease or increase the amount of sales tax payment for things like credits, discounts, fines, interest, penalties, and corrections for rounding errors.

Enter the adjustment amount and reason for the adjustment. You can enter a positive or negative amount.

Then select an account to track the adjustment. Don't select the sales tax Payable account. Instead, use the following:

  • Credit or applying a discount: Select an income account, such as Other Income.

  • Finepenalty, or interest due: Select an expense account.

  • Rounding error: Select an income account for negative errors, or an expense account for positive ones.

Use PayTraQer with Quickbooks to Automate Your Sales Tax Compliance

PayTraQer is a powerful application that syncs online payments and e-commerce sales with QuickBooks Online, making it easier than ever to ensure accurate sales tax compliance.

With PayTraQer, businesses can quickly and easily record all payments received and as a result, all associated taxes paid. The automated, real-time updates save time and money for businesses who would otherwise spend hours manually entering data into multiple systems. This automation also eliminates the possibility of double entry mistakes or inaccuracies due to manual data entry.

The application is easy to set up and use. Once the setup is complete, all payment information received from customers will be automatically synchronized with QuickBooks Online in real-time. Additionally, PayTraQer can be customized for business needs by integrating with other applications such as Shopify or Stripe which provide more detailed information on customer orders.

All of these mechanisms make it easier for businesses to accurately report their taxable income while ensuring they meet local tax laws.

FAQs

What are the main 3 types of taxes?

The three main types of taxes are:

  • Taxes on Income

  • Taxes on Property

  • Taxes on Goods and Services

Which states do not charge sales tax?

Five states don't require sales tax from their citizens, but that doesn't mean local areas in these same states won't. Delaware, Alaska, Montana and New Hampshire have avoided state-wide taxation on purchases – though cities within may still impose a fee for your goods or services. In Oregon specifically it's more of an exception as both the state government AND most counties do not collect taxes despite some municipalities instituting fees here and there.

Which states has the highest sales tax?

With the highest total sales taxes around 9.5%, five states are leading the pack: Tennessee, Louisiana and Arkansas at a near tie of 9.55%, Washington with just slightly less than them at 9.23% - while Alabama rounds out this top 5 list with its impressive score of 9.22%.

Are there any items or services that are exempt from sales tax?

Many states provide exemptions or exclusions from their sales tax laws for certain items or services. Some common examples include:

  • Food and groceries

  • Prescription medications

  • Educational materials

  • Clothing and shoes (up to a certain price threshold in some states)

  • Medical and dental services

It's important to note that these exemptions can vary significantly from state to state, so it's always a good idea to check the specific sales tax laws in your area.

Is VAT the same as sales tax?

A Value-Added Tax (VAT) is a type of flat levy that's applied to purchases, much like a sales tax. However, instead of the entire amount being paid at once by consumers when they make their purchase, part of it can be redistributed throughout different entities involved in the transaction.

How much is sales tax in UK?

On 4 January 2011, the UK had a significant change in VAT legislation: The standard rate rose from 17.5% to 20%. However, some transactions such as postage stamps and financial dealings were exempt from this new tax increase. Depending on what goods or services they offer customers, businesses have different rates of VAT that they must abide by accordingly.