Sales & Use Tax 101 for the Solopreneur

solo business logistics

solo business logistics
Sales and use tax: words to make even the bravest entrepreneurs quiver in their boots -- once they know about it. If this is you, that’s totally OK, it’s less a tell-tale sign of your ability as an entrepreneur and more a case of under-education on the government’s part.

In fact, I’m willing to bet 75% or more of you don’t even know what use tax is and yet you could be responsible for paying it. (Again, not your fault.) Another large portion of you probably believe sales tax is something only those in retail have to worry about, but you would be wrong. Listen up infopreneurs and service providers: You might be required to collect sales tax!

If you weren’t quivering before, you might be now. Take a deep breath, because I’ve got the keys to the beginner kingdom of sales and use tax. What you’re about to read, however, is just the foundation. With these basics in mind, you’ll have to do some research on your own, because each and every state has its own laws when it comes to taxes.

But, let’s start from the beginning.

Sales tax...Do I collect it for every state?

Thankfully, no. You only collect sales tax for states in which you have nexus. Nexus is having a presence in a state in such a way that you come under jurisdiction of that state and are responsible for taxes if your sales apply. What exactly does that mean?

You likely have nexus in a state where:

  • You live
  • You have an employee
  • You have a contractor who creates or maintains a market (This one can be confusing. I suggest calling your state’s revenue department just to be sure.)
  • You have inventory housed (A lot of sellers get burnt on this one. If you use Fulfillment by Amazon, you could be responsible for collecting sales tax in many states!)

Your next best step here is to look up the states in which you think you may have nexus and research their particular criteria. A good starting point is my Sales Tax Resource Guide; it has links to states’ nexus requirements.

In addition, there is now “click-through nexus,” which might affect you if you have affiliates marketing your products. I’ll leave it to the experts over at TaxJar to explain this one. (Note: For many states, it depends on dollar amounts of affiliate sales, and most thresholds are relatively high.) Keep your eyes open here: I would expect this idea to spread as affiliate marketing becomes a more popular trend.

So this is only for businesses selling a physical product, right?

The days of only physical products being taxed have passed with the progression of technology. Sales tax is a huge part of state revenue and they want to keep it that way!

What this means for infopreneurs selling digital goods and service providers is that you might also be responsible for collecting sales tax. I know: Crazy!

The best way to find out if your state requires you to collect sales tax is to call your state’s revenue department and ask directly. States have made an attempt to create resources to help you determine if your sales should have taxes applied, but I tend to find that these pages are vague and are often not much help.

Some digital goods you might be responsible for taxing:

  • ebooks
  • virtual magazines
  • reports
  • e-courses (falling under audiovisual works or publications)
  • audio works
  • apps or software

But again, check with your state. For example North Carolina, where I live, does tax digital goods. New York however, does not.

As for services, this really depends on your state. (Are you seeing a trend here?) Here are a few examples to show you just how deep this runs:

  • Web design is taxable in Texas, but the first 20% of the total is exempt. Updates to an existing design may not require sales tax. Graphic design is also taxable. Consulting is not taxable; it’s the realization of the idea that is taxed.
  • In some states, an entire photography package may be taxable if a physical copy of photos is delivered.
  • Hawaii doesn’t have sales tax, but does have a general excise tax for all products and services.

The truth is, there are too many oddities in the laws to list. I would suggest doing a quick Google search for ‘your service + your state + sales tax.’

What the heck is “use tax,” anyway?

Now that we have the basics of sales tax squared away, let’s discuss use tax. The two go hand-in-hand. In fact, the registration and filing is done at the same time, but they are quite different in nature.

Have you ever bought something big online and were delighted to see that no sales tax was added? You were probably pretty excited to not have that extra charge tacked on, right?

Well, not so fast! Remember how I said sales tax is a big revenue stream for states? Even though you didn’t pay sales tax on that item, they still want their money. (Shocker.) And guess what? You are responsible for keeping up with your purchases made out-of-state that weren’t taxed and sending in taxes on that item to your state under use tax.

I know. This is a major bummer, and most people either have never heard of this or have and choose to turn a blind eye. BUT, this is important. States are starting to crack down more aggressively on people and businesses who don’t pay these taxes.

Okay, so now I know I should be collecting and sending in sales and use tax. What are the next steps?

  1. The first step is figuring out if you have back taxes to pay. Unfortunately, even if you didn’t collect taxes over the past year doesn’t mean you can just start now and pretend those sales don’t matter. You are still responsible for sending money that should have been collected to your nexus states. Check to see if your state has a Voluntary Disclosure Program to disclose unfiled taxes without penalty.
  2. Find a system to help you keep up with sales tax. You have a few options here:
    • Use a sales tax platform like TaxJar or Avalara’s TrustFile. Both connect with major ecommerce platforms or can have sales imported in. They will calculate your tax due for you and e-file in certain states, for a price.
    • Find a bookkeeper who can do it all for you. Keep in mind that not all bookkeepers do sales tax and it likely won’t be their cheapest service offering. Sales tax is a pain in the rear, regardless of who’s doing it.
  3. Register with your state for a sales and use tax certificate. Some states may call this something different. This takes a while to process so start ASAP! Be sure to check out my Sales Tax Resource Guide below with links to each state’s registration page.
  4. Take note of the filing frequency given to you when you register. This will tell you how often you have to file - annually, quarterly, or monthly.
  5. File and pay. (And wipe the sweat from your brow!)

That was a lot of information -- and that’s just the basics. Tax laws are like rabbit holes. They run deep and are quite complex. If you are the DIY type, give your state’s revenue department a call, and don’t be afraid to interrogate them; they will be able to answer any questions you have. If this is completely overwhelming, you have an out! Hire a bookkeeper who handles sales tax. You might have to work with them to register your business and get everything set up, but then it will be a mostly hands-off process.

Over to you: What experience do you have with sales and use tax? Share in the comments below!

Note: One Woman Shop is not a source for expert tax advice. The information provided here is shared with the understanding that the authors and publishers of this information are not intending to render legal, accounting, tax, or other professional advice and services.

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Callie Sitek of The Smart Keep busts the bookkeeping blues for online entrepreneurs like you through training and monthly bookkeeping services. Be sure to get your FREE Sales Tax Resource Guide here. You will find your state’s important links as well as tools to help you get sales tax right the easy way!

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