I recently got this question from one of my blog readers, and I thought more of you might need this information. Most businesses that sell products have to pay sales tax to the state or city they operate in. This is a tax that you charge your customers and then pay in a lump sum to the appropriate government when it’s due. Currently the only states that don’t require businesses to pay a sales tax are Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon.
What Items are Exempt from Sales Tax?
There are some types of sales that are sales tax-exempt. Check to make sure yours fall into these categories if you think you don’t need to pay sales tax.
- Manufacturing sales. If you process a product and resell it in a different form, you’re considered a manufacturer, and anything you use in the manufacturing process is tax-exempt in most states. For example: if you manufacture DVDs, the blank DVDs, labels, ink, and shrink wrap used to produce the DVDs are tax-exempt, while the packaging materials you use to ship the final products are not.
- Casual sales. If you hold the occasional garage sale, you don’t have to pay sales tax. But once your sales grow to the level of becoming a business (you’re selling antiques every weekend at a flea market), it’s time to act like a business and pay sales tax.
- In some states, computers and accessories that you use in business operations are tax-exempt. But keep in mind: the computers must be used to manufacture finished goods to qualify. Talk to your accountant to see if yours are tax-exempt.
- Some services. Every state has different tax code around services, and some are not taxed. Check with your accountant to see if yours is exempt.
- Nonprofit businesses are exempt from sales tax.
When is Sales Tax Due?
Most states offer you the option to pay either monthly or quarterly. Sometimes it’s nicer to pay monthly so you don’t have time to forget what that money sitting in your bank account is for and spend it (then you’ve got a bigger tax bill to pay every three months). Check with your state to see what date each month your sales tax is due. Missing that deadline could cost you a fine.
I Sell Online. Do I Pay Sales Tax?
Yes, but maybe not on all transactions. The tax laws for ecommerce are still a bit confusing, but the bottom line is: you charge sales tax for customers located in states where you have a presence. So let’s say you operate out of New Jersey only. You sell your product to customers in all 50 states, but you only collect and pay sales tax for customers located in New Jersey. However, if you have your headquarters in New Jersey, a warehouse in Texas, and a call center in Arizona, then you pay sales tax on any transactions originating from any of those three states.
My Accounting Software Figures Out My Sales Tax. Isn’t That Enough?
While your accounting or invoicing software can automate much of the sales tax process, you’ve still got to keep an eye on it. Mis-entering one number could mean you don’t collect enough sales tax…but it’ll still come due from the state. Bottom line: don’t rely on machines to handle this completely. Have a hand in your sales tax calculation so you ensure your numbers are accurate.
Great post! Just one point – Hawaii does require a sales tax, it’s just called a “general excise” tax rather than a sales tax. Other states are tricky about this, too. Arizona’s is is called a “transaction privilege tax” and New Mexico’s is a “gross receipts tax.”
Also, be sure to checkout everywhere where you have nexus. You may end up needing to charge sales tax to sellers outside of your state and not even realize it. We recently put up a “Sales Tax Nexus” checklist over at TaxJar and invite anyone to check it out. http://blog.taxjar.com/sales-tax-nexus-checklist-ecommerce-sellers/ Thanks!
Thank you for the helpful post! One quick question. I live in Indiana and frequently purchase oils (coconut, sunflower, olive, etc.). I use these oils to create a new product (soap), Could this fall under the “Manufacturing Sales” category? Once I make the soap bars I sell them at craft fairs and online. Could this be tax exempt? Thank you for your help, I love your helpful articles!
We are required to pay sales tax even we are working from home and still providing services. Is it not disgusting that while we use none of government’s resources, we still have to pay income and sales taxes? I find a discrepency here which hopefully will be addressed in near future. But we all know, how tough it is to monitor income and sales figures of people working from home. Right?
I have a question as far as of the monthly wage tax they have in Philadelphia since I only sell maybe a few times a year at some festivals. I do have a taxable item but the wage tax has me confused.any help?
drop me aline
Thanks
As a business owner, you only pay a wage tax to the city of Philadelphia if you live in the city. At festivals in the state where you live, you should be collecting sales tax. But you should consult your tax accountant to make sure you are collecting all appropriate taxes for your business.
Melinda