It’s a proud day when a business expands to add locations in other states. But it also means significantly more complicated tax obligations.
Each state has its own array of business taxes. While federal self-employment, excise, income, and employment taxes are the same no matter where your business is, you’ll need to learn the laws regarding sales tax, use tax, and business and occupation tax for any state in which you plan to operate.
Generally you collect sales tax or pay other state business taxes only if your business opens a physical location in a given state. Large e-commerce retailers get hit with this issue when they open a distribution center in another state. Whether it’s a distribution center or a retail store, you must register for a sales permit to sell and collect tax in each state where you operate.
Sales tax presents a complicated tax puzzle for small businesses. If you sell something to someone in your own state, either online or at a store, you are obligated to collect your state’s sales tax and turn it over to the state tax authority. If a consumer hails from another state, however, you don’t collect tax unless it’s a state where you have another store or other physical presence. Five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not have a general sales tax; so in those states you don’t collect sales tax for sales made to in-state customers.
Adding to the muddle, in many states, particular merchandise is exempt from sales tax; dairy products, medical devices, and prescription drugs are common examples. In some states, particular types of services are taxed. So you’ll need to learn whether your products or services are taxed in the state where you’re looking to expand.
In addition, many cities, counties, and municipalities impose their own additional sales or use taxes. If you sell from a retail store, it’s not difficult to learn the rules for one or two states. As you grow, though, the administrative work will grow, too.
If you sell on the Internet, you only have to collect sales tax in states where you have a physical presence. But that situation may well change in the near future.
Forty-four states have come together to create the Streamlined Sales Tax Project. In hopes of recapturing billions in lost e-commerce sales tax revenue, the states are working to create a uniform sales tax for Internet retailers, hoping to make the case to Congress that sales tax collection across state lines is now easy enough for e-tailers so they should be obligated to collect it.
Some retailers have begun collecting taxes for states involved in the project. They’ve been helped by software from three software companies that are already collecting sales tax data for the SSTP: Taxware, Exactor, and Avalara.
Business reporter Carol Tice contributes to several national and regional publications.