Starting and running a small business is no easy feat. Between managing inventory, hiring employees, finding customers and actually making sales, it’s easy to become overwhelmed. One key aspect of running a retail business that you can’t afford to overlook is collecting and remitting sales tax. While sales tax may not seem exciting, properly charging, collecting and submitting it is crucial for any retail business owner.
In this guide, we’ll cover everything you need to know as a small business owner when it comes to sales tax permits, including:
What is a Sales Tax Permit?
A sales tax permit, also known as a seller’s permit, is a license that authorizes businesses to collect, report and submit state and local sales taxes. This applies to businesses that sell taxable tangible goods or services directly to end consumers.
Every U.S. state that charges sales tax requires retailers to register for a seller’s permit before they can begin charging and collecting sales tax from customers. This permit allows the state tax agency to monitor a business for tax compliance.
Some key things to know about sales tax permits:
- They are issued by state tax agencies, usually the Department of Revenue or Taxation
- Businesses must display the permit publicly in their place of business
- Permits are non-transferable – if you purchase an existing business, you must apply for a new permit
- They can be suspended or revoked due to tax non-compliance
When Do You Need a Sales Tax Permit?
If you are operating any type of retail business that sells tangible goods or taxable services to end consumers, you need a sales tax permit. This includes:
- Online sellers – even if you sell online or through a marketplace like Amazon or Etsy, if you have nexus in a state, you still need a sales tax permit.
- Service providers – taxable services like auto repair, electronics repair, pet grooming and more require a sales tax permit.
- Restaurants and food sellers – all prepared food sales, including dine-in, takeout and delivery are subject to sales tax and require a permit.
- Contractors and tradespeople – construction services, plumbing, electricians and similar trades must collect sales tax on labor and obtain a permit.
- Rental companies – equipment, machinery, vehicle and other rentals are generally taxable and require a permit.
- Retail stores and boutiques – all types of retail stores that sell goods directly to consumers need a sales tax permit.
If you make exempt sales like unprepared groceries or prescription medicine, you may not need a permit. But most retail businesses will need one to comply with state laws.
Sales Tax Nexus – What Creates an Obligation to Collect Sales Tax?
Before applying for a sales tax permit, you need to determine if you have nexus in a particular state. Sales tax nexus refers to a business having a significant connection or physical presence in a state that requires it to register and collect sales tax.
There are a few ways your small business can establish sales tax nexus:
- Physical locations – having a retail store, office, warehouse or other facility in a state creates nexus.
- Employees – having employees, representatives or independent contractors working in a state can create nexus, even if you don’t have a physical location.
- Inventory – storing inventory or fulfillling orders from a warehouse or other facility in a state triggers nexus.
- Sales thresholds – some states have economic nexus laws requiring out-of-state sellers who exceed certain sales thresholds to collect sales tax.
- Trade shows – attending trade shows, pop-up shops or other temporary sales events for a certain number of days per year can establish nexus.
- Affiliate nexus – having affiliates or related companies based in a state can create nexus for your business.
It’s crucial to understand nexus laws in each state where you have a physical presence or economic ties. Failure to register when nexus exists can lead to penalties, interest and back taxes.
How to Apply for a Sales Tax Permit
Applying for a seller’s permit only takes a few steps:
- Determine nexus – figure out which states you have nexus in based on the physical, economic or affiliate ties mentioned above.
- Find the application – search “[state] sales tax permit application” to locate the website to apply. Most are filed with the State Department of Revenue or Taxation but this can vary.
- Submit application – the business owner completes the form with key details including business name, address, ownership structure, contact details and a description of business activities. Filing fees range from $10 – $100 per state.
- Display permit – once approved, the permit must be prominently displayed in your business location. For online businesses, it should be visible on your website or invoice.
- Manage account – regularly file and pay sales tax reports and returns, usually monthly or quarterly. You can manage tax payments, update business details and renew permits through your online account.
Some states allow businesses to register for multiple permits at once through the Streamlined Sales Tax program. You’ll also need to check local requirements for county and city sales tax permits – these are sometimes handled separately.
Collecting and Remitting Sales Tax – Key Requirements
Once registered, you must start charging all applicable sales taxes on products and services sold to end consumers in that state. Here are some key compliance requirements:
- Taxable amount -sales tax is calculated as a percentage of the total taxable sale. This doesn’t include exempt items like unprepared food or prescription medicine.
- Tax rate – the state sales tax rate plus any local rates must be charged at point of sale. Rates range from 2.9% – 7.25% but some cities charge more.
- Exemption certificates – if a customer claims a sales tax exemption for resale, wholesale, tax-exempt organizations or other qualified reasons, you must collect an exemption certificate.
- Reporting timeframes – sellers must file regular sales and use tax returns, usually monthly or quarterly, and remit taxes due on those sales. Returns are filed with the state tax agency.
- Recordkeeping – detailed records of gross sales, exempt sales, taxable amounts, sales tax collected and remitted and exemption certificates must be maintained for 4-7 years.
- Audits – businesses may be randomly selected for sales and use tax audits to ensure they are properly collecting, reporting, and remitting. Documentation is key to passing audits.
Properly charging, collecting, reporting and remitting sales taxes is crucial to avoid penalties for non-compliance. Using retail accounting or point of sale (POS) software can help automate these processes and simplify sales tax management.
Sales Tax Exemptions – Who Does Not Pay Sales Tax?
While most goods and some services sold to end consumers are taxable, there are cases where no sales tax should be collected. Common sales tax exemptions include:
- Wholesale sales – items purchased for resale or further business use are exempt when the buyer provides a resale certificate.
- Non-profits – charitable organizations like churches, schools, hospitals and government agencies can make tax exempt purchases by providing an exemption certificate.
- Food and food ingredients – sales of grocery foods that have not been prepared or heated on site are exempt from sales tax in most states.
- Medicine – over-the-counter and prescription medicines are exempt. Dietary supplements do not qualify.
- Clothing – most states exempt clothing under a certain price point, like $100 or less per item.
- Manufacturing equipment – machinery, tools, parts and other items used directly in manufacturing processes are exempt from sales tax through manufacturing exemptions.
- Farm equipment – machinery and equipment used in agriculture or livestock production qualify for farm exemptions.
There are more obscure exemptions like containers, films, mothers’ breastpumps and even race horses in some states. Carefully review exemption laws and require buyers to provide valid certificates to avoid collecting tax improperly.
Penalties of Not Having a Sales Tax Permit
Failing to register for a sales tax permit when your business has nexus can lead to hassles down the road. Consequences may include:
- Tax assessments – states can audit and bill your business for several years of back taxes, interest and penalties. This unexpected expense can devastate small businesses.
- Legal action – states may file civil or criminal charges against business owners who deliberately fail to register and charge sales tax when required. Jail time is rare but fines up to $1000 per violation are possible.
- Revoked business licenses – some states can rescind or fail to renew business licenses of those not in tax compliance until they register for a seller’s permit.
- Marketplace removal – Amazon, Etsy and other marketplaces may suspend or ban sellers who are not properly registered to collect sales tax.
- Customer confusion – shoppers expect taxes added at checkout. Not charging sales tax can raise questions and drive customers to competitors.
A sales tax permit shows customers, suppliers, marketplaces and the state tax agency that you are running a legitimate retail business. Don’t risk avoidable disruptions and penalties by skipping this crucial step.
Sales Tax Registration – Bottom Line for Small Business Owners
Managing sales tax registration, collection, reporting and payments adds another layer of work for entrepreneurs trying to run successful small businesses. But properly charging sales taxes is not only required by law in 45 states and 10,000+ jurisdictions, it can level the playing field with larger competitors so you don’t appear cheaper by skimping on taxes.
Here are some tips as you tackle this less-than-glamorous, but essential aspect of compliance:
- Use an online sales tax calculator like the easy tool at SalesTaxCalculator.Online to instantly check rates in any address across the country. No more rate lookup hassles.
- Consider retail POS systems that automate sales tax calculations, improve accuracy and integrate reporting.
- If selling online, use plug-ins that automatically calculate sales tax at checkout based on shopper’s location.
- Outsource to an accountant or bookkeeper if managing frequent tax returns becomes too cumbersome.
- Stay organized with tax calendars, reminders and digital filing so documents are accessible if audited.
- Fight any proposed tax assessments and negotiate for penalty abatement – tax agencies often settle for a fraction of original bills.
With the right tools, knowledge and professional support, managing sales tax compliance does not have to be an overwhelming challenge as you grow your retail business. Master the fundamentals, stay organized, automate processes where possible, and don’t be afraid to ask for help along the way. Now get out there and make those sales!
Frequently Asked Questions About Sales Tax Permits
- When should I apply for a sales tax permit?
Apply for a seller’s permit as soon as you start operating any type of retail business that will sell taxable goods or services to end consumers. You need the permit before you can legally begin charging sales tax.
- Can I register for permits in multiple states at once?
Some states allow for consolidated registration for sales tax permits through the Streamlined Sales Tax (SST) system. This allows you to register in multiple member states at the same time via a single application.
- What information do I need to apply?
You’ll need to provide basic business information including legal name, ownership structure, address, description of business activities, owner contact details and EIN/SSN. Application fees apply.
- How long does it take to get a sales tax permit?
Approval times vary by state but expect 2-4 weeks after submitting the application and fees. Some states allow temporary permits for immediate compliance needs.
- Can I charge sales tax before receiving my permit?
No, sellers cannot legally collect sales tax until they have received an approved sales tax permit for that state. Avoid interest and penalties by waiting for the permit.
- How often do I need to file sales tax returns?
Most states require monthly or quarterly filing of sales and use tax returns to report taxes collected and remit amounts due. Due dates vary.
- What records do I need to keep for sales tax compliance?
You must keep detailed records of gross sales, exempt sales, taxes collected and remitted, exemption certificates, and all other data related to charging, collecting and reporting sales tax.
- What if I make a mistake on my sales tax return?
If you discover an error that resulted in over-payment, you can file an amended return to get a credit or refund. If you underpaid, immediately pay the outstanding balance with interest.
- Can my permit be revoked?
Yes, states can suspend or revoke permits due to tax non-compliance. This results in inability to legally collect future sales tax so staying compliant is crucial.
- What if I need to close my business?
Notify the tax agency in writing if you close your business so they can cancel your permit. You will need to file a final tax return covering any remaining tax liabilities.
