On today's episode of the Unf*ck Your Biz podcast I discuss everyone’s favorite topic - sales tax.
Coming up on March 14th at 9am PST I am hosting an Open House. I'm calling it the anti-webinar and if you've been curious about how to get access to all my resources or work with me, I'm going to be sharing a new offer in order for you to have me as your tax and legal friend on demand (and this offer will include access to information on sales tax). Unlike 1:1 legal services, you'll have all the tools and resources you need at your fingertips at an extremely accessible price point. Click here to register for the Open House.
The tricky thing about sales tax is that it varies state to state and it can feel like a total mystery to everyone. We know we pay sales tax when we buy stuff at the store, but how does it apply in the context of our business?
Sales tax has nothing to do with income taxes. Read that again. Sales tax is a consumption tax and consumption tax is the tax on the sale of goods and services. Business owners are treated as agents of the state with regard to sales taxes. When we collect the sales tax we’re a holding account and collector for our state’s government. It is illegal to spend money collected for sales taxes.
We need to focus on collecting sales tax in a state where we have nexus. There is nexus when there is a connection between your business and a state for you to be subject to sales tax in that state.
Physical presence - You live ,work, and do all things in that state. In most states, you would also have nexus if you have a regular presence in that state, like employees or an office in the state. My rule of thumb is assume you have nexus in your home state and do your due diligence into researching sales tax laws in any state where you do business more than once a year.
Economic nexus - If you sell physical goods and only ship to a specific state, you do not have physical nexus in that state. A business may have nexus in a state they are not physically in if they surpass certain sales thresholds, commonly $100,000 in sales or 200 total transactions in the state within a given year. If neither of these apply to you , you can focus on physical presence. If they do apply, I dive into this deeper in the Profit Rx textbook for your best next steps.
Once you know where you owe sales tax, you then need to determine on what you owe the sales tax. There are three main types of products you might be selling - tangible personal property (with the exception of real estate), digital goods, and services. Each state has its own subrules on sales tax, especially for digital goods and services.
The next question is - what happens when you have a service mixed with a physical good? This also varies state by state and comes down to the line items of each offering with sales tax charged on one line item of the invoice and not others.
Where does sales tax come in when it comes to buying and reselling, especially in the case of wholesale? You can apply to purchase from retailers free of tax. You then resell and collect tax on the full sales price. If you pay the sales tax upon your purchase, you will then only charge your buyer sales tax on the difference between your purcase price and sale price.
Have questions? Bring them to the Open House on Monday.
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