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What is Sales Tax?
Sales tax is a tax on consumers by their state and local governments. Sales tax is charged to the consumer and is calculated as a percentage added to the price of a product.
How does Sales Tax work?
The seller is responsible for calculating sales tax, collecting it from consumers, filing it with the state, and remitting the funds to state and local governments. States and local governments use that money to fund schools, parks, roads, and special projects. There’s no federal sales tax. In the United States, sales tax only exists at state and local government levels.
How do you know if you are required to collect sales tax?
For any state you have sales in, you need to figure out two things and in this order:
1. Is what you’re selling a taxable item in that state?
If it’s not a taxable item, then you can proceed as usual and invoice the client without sales tax.
You need to figure out the next step if it is a taxable item.
2. Do you have sales tax nexus in that state?
If you don’t have sales tax nexus in that state, you have nothing to worry about, and you could proceed as usual and invoice a client without sales tax. However, if you do have sales tax nexus in that state, you need to register with the state to collect and file sales tax. You’ll also need to add sales tax to your invoices for your clients.
What are taxable items?
Most states generally tax tangible goods, meaning physical items you can touch. For example, a wedding album, a thumb drive, or a custom-designed t-shirt.
Some states tax services. New Mexico, Hawaii, West Virginia, and South Dakota broadly tax most services. In addition, other states tax certain services. You could see why ensuring you understand each state’s rules is important.
How do you know which rate to charge?
Sales tax rates vary across states, cities, counties, and local areas. Therefore, you may have to calculate a mixed sales tax rate.
For example, I’m in Buffalo, New York. Sales tax for the State of New York is 4%, and in Erie County, where I live, the county sales tax is 4.75%. So that’s a total of 8.75%, where when I report, 4% goes to the state, and 4.75% goes to my local county.
How do you register to collect sales tax?
You could start by looking up sales tax laws for your state. Every state has a website with taxation information for individuals and businesses. In addition, you can enroll in Sales Tax 101 for Photographers, where we cover all of these details.
You’ll need to find the state you want to navigate to; then, you’ll find the sales tax portion of their site. Each state has a publication that explains when you must register to collect sales tax, how you figure out what rate you’re using, and how often you’ll need to file and pay.
What if it’s not clear on the state’s website?
Call the state if you cannot determine if you need to collect sales tax or if you’re just unsure how to file. When I’m working with a new client in a particular state, and it’s unclear to either of us if they need to collect sales tax, I will pick up the phone and call. I’ll explain the business, what they sell, how they sell it and get direct guidance from that state’s sales tax office on what we need to do. This is a valuable resource. You should use it, and it’s free. Talking directly to the state will remove any doubt of what you should be doing to stay compliant.
What the heck is Nexus?
Nexus is a fancy way of saying you have a significant presence in a state. If you have a sales tax nexus in a state, you must register, calculate, and collect sales tax. Nexus is an easy concept to understand, but determining what activities or thresholds trigger Nexus in each state can be challenging, as rules vary widely from state to state. Let’s look at some examples of sales tax nexus.
One of the most basic nexus rules is that if your business has a physical presence in a state, you’ll be required to collect and remit sales tax there. So it’s relatively simple if your business is located in a particular state and you only have sales within that state, then you only collect and remit your home state sales tax. However, if your business locations in multiple states, you may create Nexus in each of those states. This can apply to branches, stores, warehouses, drop-shipping facilities, or any real estate or property that belongs to your business in another state.
Delivery and distribution
As long as you ship goods to customers by a common carrier, such as USPS, UPS, or FedEx, you’re unlikely to trigger a sales tax obligation through delivery, but you’ll need to check each state carefully. In some cases, however, using a drop shipper or a contract with a distribution company that functions as a drop shipper is considered a taxable nexus-creating activity in some states.
Nexus can also be created if you have employees in a different state or if employees or contractors conduct any work at a customer’s out-of-state location or deliver products in another form on your behalf. Nexus may apply.
Regularly attending trade shows in other jurisdictions beyond the physical location of a business can also be considered Nexus in certain states.
Advertising and affiliates
If you advertise online or use affiliates to get business, you may trigger Nexus. For example, whininess in another state sends customers to your business through links on a website, which can create Nexus in the originating form, according to the affiliate or click-through nexus laws.
You can see how this starts to get a little overwhelming
In the summer of 2018, a new nexus trigger called Economic Presence was born to make everything more interesting. You may have heard some things about it on the internet or social media – especially the supreme court case of South Dakota versus Wayfair.
South Dakota versus Wayfair
On June 21st, 2018, the supreme court enacted the economic presence requirement, which removes the need for a physical presence in a state to create sales tax nexus. Instead, new criteria will trigger sales tax nexus based on sales and transactions in a particular state.
Let’s look at some examples of economic presence.
For example, California has added economic Nexus, which puts California’s threshold at $100,000 or more of sales in the State of California or more than 200 transactions in the previous or current calendar year.
This means if you are selling taxable goods in the State of California, even if you live in, say, New York, if you are meeting the threshold of $100,000 or more in sales or 200 transactions in the previous or current calendar year, you may have to charge sales tax on California transactions.
Let’s look at another example.
Connecticut has a threshold of $250,000 or more in sales AND 200 or more transactions in the previous calendar year. So you can see how this is a little bit different than California. So Connecticut wants you to have sales of $250,000 or more AND 200 transactions. So you have to meet both criteria to trigger economic Nexus in Connecticut.
Forty-five states have sales tax. Only five states without a sales tax are represented in gold: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of the 45 states with sales tax, 36 have already adopted economic Nexus and more forms are adopting it as time goes on. This is a great example of how sales tax laws vary from state to state. That’s why it’s important to understand sales tax laws and Nexus for any state in which you have sales.
You can click HERE to see the details of the economic Nexus for each state that has adopted it and some details on those that are in the works of adopting it.
Why is Sales Tax compliance important?
Because non-compliance can cost you! States do not mess around when it comes to non-compliance. You could end up owing significant penalties and fines, not to mention back sales tax if unpaid. They can shut your business down. They can put a lien on your business or personal accounts based on your business entity. You could go to jail. We’re talking directly to jail, do not pass go, do not collect $200 kind of jail time. Sales tax non-compliance can be severe. You must understand the sales tax laws of any state you work in.
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