How do I determine if my business has sales tax nexus in a state?

Determine nexus by reviewing business activities: physical presence such as employees or inventory, economic thresholds for sales or transactions, use of third-party warehouses, and marketplace arrangements. If any of these connections exist, the state may require registration and collection.

What records should I keep to remain compliant with sales tax requirements?

Keep sales receipts, filed returns, proof of payments, exemption certificates, and documentation of nexus triggers for at least three years. Organize records by state and permit to simplify reconciliations and audits.

Sales Tax for Small Businesses: A State-by-State Guide

What to do, step by step when it comes to register, collect and file sales tax in several states

For small businesses, juggling multiple hats is common practice, and sales tax typically ranks near the top. This state-by-state guide provides small-business readers with a practical roadmap for when and how to figure out where you are required to collect tax, how to register there, how to deal with varying state rates and exemptions, and how be in compliance without undue stress.

Why this matters

Small business duties under sales tax laws can differ vastly. Depending upon the jurisdiction, a single sale can have the effect of triggering registration requirements in multiple states; and state rules and rates vary. Having the basics in place minimizes audit risk, avoids expensive penalties and allows for smooth customer relations.

Step 1: Leverage nexus (where you collect sales tax) To know where to collect and file sales tax, figure out your “nexus.”

Nexus is what establishes a relationship between your company and a state that requires you to collect sales tax. Nexus can be:

Nexus can be:

Physical: A site, an employee there, inventory on site or regular presence in a state.
Economic: hitting a sales or transaction threshold in a state.
Click-through or marketplace: links are created through referral and third-party seller fees.

The first step is to map out your activities: Do you store inventory in another state, have remote employees or do a large amount of in-person sales? If so, that state can assert nexus.

Step 2: Register to collect

When nexus is found, apply for a sales tax permit in that state before you start collecting tax. Registration procedures differ, registration fees differ, permitting generally provides you with a account number and lodgement requirements. Keep the number of each permit, effective date, and reporting period placed by the state.

Step 3: Learn what is taxable vs. non-taxable

States vary in what qualifies as a taxable sale. Physical goods are generally taxed, while services may or may not be taxable, depending on the jurisdiction. Special rules apply to some items, such as groceries, clothing or digital goods. Keep organized with what you’re selling and mark which products are taxable in which states.

Step 4: Know state sales tax rates and local exceptions

State sales taxes rates are a jumping-off point, but counties, cities and special districts can tack on local rates. A state could have a dozen or hundreds of different combined rates, depending on the delivery address. For businesses that sell across state lines, check the combined rate for the address to which you are shipping for every order.

Step 5 : The right bit of collection

You may pass along to the customer at your destination point either; (i) the total amount of both filing fees plus any adjustment in rates that result in taxable items or (ii) only the total rate increase that applies from the origin point, which does not support a resulting taxable item. If you sell in person, charge the rate that applies where the sale occurs. Don’t change your policy on whether to tax shipping or handling — the rules can be inconsistent, and depend sometimes on whether shipping is separately stated.

Step 6: Submission and payment

How often you file is generally a state matter and based on your sales volume, so it can be monthly, quarterly or annually. The return and payment due dates vary based on the state, as does the format. Failing to file can lead to penalties and interest. Maintain a due date calendar keyed to each permit.

Step 7: Exemptions, resale certificates and documentation

Most buyers dodge sales tax (resellers, nonprofits, government agencies). Obtain and keep current exemption certificates as required. Make sure resale certificates are filled out and kept with your business papers. If audited, states will want to review paperwork proving why tax was not collected.

Step 8: Handling more than one state well

To reduce complexity:

Keep good records: have one invoice and receipt system that tracks tax collected by jurisdiction.
Manufacturers can create taxability rules by tagging a product type and associating the type with states that tax the item in question.
Track nexus triggers: update your nexus map whenever you open new locations, third-party fulfill, or meet sales thresholds.
Reconcile three ways to Sunday: Track monthly reconciliations of sales, tax collected and returns, to avoid surprises and digitize filing.

Common pitfalls to avoid

If one rule applies everywhere: state rules vary on digital goods, services and shipping.
Overlooking local rates: city and district taxes can significantly affect the amount due.
Misplacing exemption certificates: a lack of these can turn exempt transactions into taxed ones, and with fines to boot.
Late registrations: Conducting business when you should have acquired a permit can result in back-tax responsibilities.

Recordkeeping and audit readiness

Maintain a record of sales receipts, exemption certificates, returns filed and pay the tax due for three to five years. Sort records by state and permit.state. A minimally structured filing system, attached to each jurisdiction’s account number, makes audits faster and less painful.

And here are practical pointers for small-business owners

Begin with a nexus checklist: physical presence, inventory locations, employees, marketplace activity and sales thresholds.
Document policies: internal rules for taxing your products, shipping taxation and how you collect exemption certificates.
Automate when you can: Batch reconciliations, reminders scheduled for the filing of registrations and other automation surrounding consistent invoice templates all help reduce human error.
When in doubt, refer to the state’s registration documents and guidelines provided by the department of revenue to double check; regard that as gospel.

When to seek professional help

If you do business in numerous states, store goods with third-party warehouses or have complex product taxability issues, you can manage your risk by seeking help from a pro. Advisors can assist with sister-state nexus analysis, voluntary disclosure agreements (to reduce the liability for noncompliance), and audit defense planning.

Quick compliance checklist

Identify states with nexus.
Obtain permits where necessary.
Identify taxability on a per-product or service basis by state.
Obtain and keep exemption forms.
File and pay on time.
Keep records three years neatly organized.

Conclusion

Small business sales tax may feel intimidating, but when you break the challenge into clear steps it becomes more manageable. Figure out nexus, register timely, be aware of the proper combined rates to collect; maintain detailed records and reconcile frequently. By going through a methodical process, small businesses can wade the waters of state sales tax rates and compliance safely and with ease, their risk reduced to an acceptable point all the while keeping their staff costs down