Collecting Sales Tax

Selling across state lines means entering into a host of state and local tax issues. Don’t let “SALT” take a pinch out of your hard-earned profits.

It’s tempting to jump into the $200 billion e-commerce marketplace, but small business owners could be in for a costly surprise if they don’t understand the tax implications of not collecting sales tax on products sold across state lines. The myriad state and local taxes, or “SALT” for short, can create a confusing mosaic business owners have to navigate. Take Twix for example. It’s a taxable candy in some states and a non-taxable cookie in others, depending on the quantity and the way it’s purchased.

“Businesses have an obligation to collect sales taxes anywhere they maintain a significant physical presence,” says Diane Yetter, founder and president of the sales tax consulting firm, YETTER. “If they fail to collect when the sale is consummated, the business owner has to pay the taxes and penalties.”

When are business owners required to collect sales tax?

If your business has a physical presence in a state—known as a nexus—then you must collect sales taxes from customers located in that state. What’s tricky is that each state defines nexus differently and you may have to collect sales tax if a buyer clicks through from another website or blog. Simply having a store, office, warehouse, employees or a relationship with a distributor or e-tailer in a state may create a nexus, and the definition is always changing.

Which tax rates apply?

Generally speaking, the tax is governed by the transfer of possession which is usually the ship-to location in online sales. However, sales of some items are exempt from taxes in various states. For example, clothing and footwear costing less than $110 are exempt from sales tax in New York but not California. And sales to non-profit organizations may be tax-exempt; however, you’ll have to verify the organization’s status or pay the tax yourself.

How can small business owners keep SALT from pinching their profits?

Don’t start selling across state lines until you understand the laws and requirements. Consult free or low-cost resources such as webinars, local seminars and the SBA website. Consider integrating an online tool into your website to calculate and collect the sales tax on interstate sales. Remember to factor in the cost of tax permits and filings as well as any software set-up and processing fees when pricing your products to keep SALT from pinching your profits.

Finally, stay informed. Congress is currently considering several bills that could create a uniform tax code for interstate sales or exempt some small businesses by establishing a sales threshold.


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This information is general in nature and is not intended to be legal, tax, or financial advice. Although Regions believes this information to be accurate, it cannot ensure that it will remain up to date. Statements or opinions of individuals referenced herein are their own—not Regions'. Consult an appropriate professional concerning your specific situation and for current tax rules. Regions, the Regions logo, and the LifeGreen bike are registered trademarks of Regions Bank. The LifeGreen color is a trademark of Regions Bank.