How does the sales tax work?
Sales tax is a tax paid by the end user (consumer) of a tangible product (and in some cases service) sold by a retailer. This tax is paid on a state level (there is currently no national sales tax or VAT).
For example, if you own electronics store in NYC, and a customer comes in and buys an item in your store, you would apply 8.875% (as of 2013) tax on top of the price paid by the customer. Then you are responsible to file a sales tax report to NY state and remit (pay) all the tax money collected from the customers.
How do I know if I need to apply sales tax on the stuff I sell?
Excellent question. Before reaching a conclusion you must answer three questions first:
Are you selling to end users, or are you a wholesaler? Only retailers selling to end users are required to collect and remit sales tax.
Does your business have nexus in any state that has sales tax? Nexus is physical connection, and we discuss it later in this article. Some states (Alaska, Delaware, Montana, New Hampshire and Oregon) have no sales tax to begin with.
Is your product/service taxable to begin with? Keep in mind, most tangible goods are taxable, while most services are not, but each jurisdiction has its own rules, so it’s not that simple.
Should I register in a state that has no sales tax, to avoid having to deal with it?
Sorry, but it’s not that easy.
For example, let’s assume you register in Delaware (that has no sales tax) and you are selling some tangible items by shipping them from China to buyers in the U.S. Since in this case your business only has nexus in Delaware (as state of registration), you will not have to worry about sales tax at all. However, if you are using a U.S. dropshipper that ships the product from warehouses in California, Kentucky and New Jersey, technically you are required to collect sales tax from buyers of your product in all three mentioned states.
If you register your company in Wyoming instead of Delaware, you add Wyoming as another state to collect sales tax in. Sounds inconvenient, but only if you assume that a serious number of consumers of your product are roaming the vast stretches of the least populated U.S. state. We are deeply in love with Wyoming, but your chances of selling anything in that state are mostly close to zero, so you might not even need to worry about registering for sales tax there until you make a few Wyoming sales first.
How do you register for sales tax in all these states? Read further.
If I am registered in one state, but my vendors are drop shipping the stuff I sell in other states - which state do I need to collect sales tax in?
As you learned from the previous question, your company nexus spreads to all states where your dropshipper has nexus. So unless your dropshipper processes the payment side of your sales, or unless you make no sales in any of these respective states, you need to obtain permits in each of these states (as well as in your state of registration, if it has sales tax).
I know that I need to collect sales tax. How do I register?
We can help you with the registration in any state. Depending on the state this permit will be called "sales tax ID", "sales permit", "reseller permit", "vendor ID", or just "tax ID". We have this item available for purchase on its own.
After I register, how do I do reporting and remit sales tax?
You will find a good CPA (accountant) who will handle your sales tax filing as well as your income tax filing. You can try doing it on your own, but we don’t recommend it.
My business is registered in one state, but my supplier is in another. They want me to show sales tax registration in their state - how do I do it?
Almost all states have procedures to obtain sales tax permit without having to register the company as "foreign entity". It is usually called "out-of-state vendor ID" or something of the kind. We help with these permits as well.
Keep in mind though, if your supplier is also the one processing the payment then they will be collecting sales tax and reporting it to the state themselves, so you don’t really need to obtain your own permit in case like this.
I want to buy products in the U.S. and sell them in my country - do I need to register for sales tax?
Obviously you don’t need to collect sales tax in the U.S. on these sales, but you might need to collect some sort of VAT tax in the country were you sell, so check the rules there.
However, the real question is this - can you buy from U.S. vendors without having to pay sales tax on these purchases (in wholesale)? The answer is yes, provided you obtain sales tax ID. That’s why it’s also called "reseller permit" - you want to resell the products you buy at wholesale, to the end users, without being considered end user yourself. Check with a CPA if the state in which you obtain the permit requires you to file zero tax reports.
How do I report sales tax in all the states I am registered in?
Just as you do in one state - have your CPA file reports in each state you are registered in for sales tax, and cut checks for each state (or pay online, whatever the procedure is).
Do I need to register as foreign entity in states where I am registered to collect sales tax?
Not necessarily. We distinguish the two cases as "soft nexus" and "hard nexus" (this is not official designation, we just like to call it this way).
"Soft nexus" has to do with connection strong enough to require you to register for sales tax (for example, if you have a supplier who ships from a specific state), which is usually done with state’s taxation department (or it’s equivalent), but not strong enough for registration with Secretary of State (or whatever authority registering companies in the given state).
"Hard nexus" is when you have physical connection to a state, for example if you have an office, warehouse, employees, or if you are managing the business from this state and are physically located there.
So register for sales tax only in states where you have “soft nexus”, and register foreign entity and sales tax in states where you have "hard nexus"