In 2021, the United States government received approximately $4.05 trillion in tax revenue.
Like ordinary citizens, businesses are also required to pay taxes. One of the most common forms of taxes for businesses is sales tax. Businesses are supposed to submit a sales tax registration application to begin collecting funds from customers.
If you’re new to starting a business, understanding how to register for sales tax can be confusing. Fortunately, the process is relatively straightforward. In this sales tax registration guide, we’ll cover everything you need to know.
What is Sales Tax?
Sales tax is essentially an official tax on a company’s goods and services. This tax is traditionally levied during the final purchase of a good or service. One common misconception is that sales tax is only levied against retail purchases.
In reality, sales tax is required for online sales, rentals, and leases. Depending on the state you live in, sales tax will look different and have varying rules. This means that the federal government doesn’t impose taxes on goods and services.
This authority is given to the states, while the federal government devotes its resources to collecting revenue from income, investments, and gains.
What is Use Tax?
Sales tax rates are defined by individual states. So, what happens if a businesses sells to another that’s out-of-state? This is where use tax comes into play.
Use tax is a form of sales tax made on purchases that are outside a company’s state jurisdiction. It’s essential state tax for out-of-state purchases.
Use tax is the same amount as the resident’s sales tax. For example, let’s say that the sales tax rate in Tennessee is 7%. If you live in Tennessee and sell to an out-of-state company, you would charge them the same rate.
This means that state and use tax can’t be applied at the same time. Either you’ll charge state tax to domestic buyers or use tax for out-of-state buyers.
What is Sales Tax Registration?
Sales tax registration is a simple concept. It’s basically an agreement made by a business to collect taxes on its behalf. This agreement is similar to payroll taxes, also known as a trustee tax.
When you agree to collect sales tax, you waive the right to all the money you collect. This means if you forgo remitting the sales tax to your state, you could receive harsh penalties and fines.
These penalties can be levied on owners, shareholders, and even employees responsible for the negligence. To complete a sales tax registration application, you’ll need to fill out the following information:
- Personal information for owners and shareholders
- Company physical location
- Type and volume of sales
- Federal tax employer identification number (FEIN)
Are There Any Exemptions to Sales Tax?
Contrary to popular belief, not every business isn’t subject to pay sales taxes to their state. In fact, charities, non-profit organizations, and resellers are all exempt from sales tax requirements.
In some states, you can apply for an exemption if your case has merit. In other states, resellers can show the necessary paperwork to the seller when a sale is being finalized to avoid sales tax.
What is Nexus?
When completing a sales tax registration application, you may encounter the term “nexus”. Nexus is simply a technical term that denotes a company’s legal burden to collect and remit state taxes in a particular sate.
This means that the responsibility of collecting sales tax is on the seller instead of the buyer. Because of this, businesses must keep track of the type of transactions that require sales tax.
You should review your sales and use tax nexus when you:
- Open a new business
- Set up a new physical location in another state
- Hire contractors and employees in another state
- Change your business structure
- Partner with out-of-state affiliates
With that said, let’s discuss where sales and use tax is levied in the United States.
Where is Sales and Use Tax Levied?
45 states (including Washington D.C.) impose sales and use tax. There are other states with older constitutions that don’t, such as:
- New Hampshire
It’s important to mention that not all sales and use tax is set by states. Different municipalities and counties will set its own rates. This means that you’re subject to your county’s set tax if it’s different from your state tax.
Does State Tax Apply to International Companies?
The short answer to this question is yes. All domestic and international companies that sell goods and services into the United States are required to pay and remit sales tax.
This presents a challenge for companies that don’t have a FEIN or operate outside of the country. If you are facing this problem, make sure to use tax registration service.
This way, you can partner with professionals that will help guide you through the registration process and ensure you avoid hefty fines and penalties from your state.
Important Sales Tax Registration Tips
With all of this information out of the way, you are now steps closer to completing a sales tax registration application. It’s important to note that this process is essential.
Here is some helpful sales tax registration advice to put you on the right track:
- Learn more about state and use tax before submitting an application
- Gather all of your essential documents first
- Find out your state’s tax rate before applying
- Use a tax registration service to expedite the application process
- Double check your application before sending it in
Once you complete your application, be patient and wait a few weeks to hear back.
Learn More Helpful Business Tips
As you can see, understanding how sales tax registration works is a basic process. Most businesses operating in a state are required to pay sales tax, and it takes a brief application to get started.
Overall, using a tax registration service will take the headache out of applying for sales tax. With that said, do you want to learn more business tips? If so, check out our blog for more helpful articles.