Startups and sales tax: getting started
- Mar 1, 2017 | Laura McCamy
Your million-dollar idea could be a smartphone app that reminds people to floss (and makes you the dentist's favorite!) or a pet food delivery service or some other terrific business that no one else can do quite the way you can. You take the leap and create a startup.
Amidst the heady early days of your startup, you might want to put financial matters on the back burner. Why worry about taxes when you haven’t even turned a profit? There is one topic where you’ll need a fast learning curve: startups and sales tax. If you don’t get it right early on, you could pay for it with big penalties later.
Startups and sales tax: yes or no?
The first question is whether your business is subject to sales tax. If you sell your smartphone app electronically, very few states will tax it. But if you sell your app on flash drives, the sales tax picture changes. When you transfer tangible personal property (or TPP) to your users, some states, like Colorado, will require you to collect and remit sales tax on your app.
Your pet food delivery service will need to charge sales tax on the products you deliver to your customers, with some exceptions. If you add a separate charge for your delivery service, that charge could be taxable. New Mexico and South Dakota tax most services. Other states, such as Texas, add sales tax to some services and not others.
What if your startup wholesales products to other businesses? Wholesale sales are not usually subject to sales tax (except in Hawaii).
Sometimes, however, even wholesale businesses need to collect and pay sales tax. Let’s say you make pajamas out of flannel with cat prints. It’s the end of the season and you have some old stock left over that you can’t sell. You decide to have a warehouse sale and open your doors to the public. You sell your pajamas at the wholesale price, but you will need to add sales tax, since you are selling directly to the public.
If you sell food, your product won’t be subject to sales tax in many states, since food products are often exempt from sales tax. There are numerous exceptions, however: if you make caramel-filled chocolates, your delicious creations will be subject to the crazy sales tax laws on candy, which vary from state to state. If you sell food products, even if edibles are only a small part of your startup, you'll need a clear understanding of sales tax regulations on foods in the states where you do business.
Before you open your new business, do a little research on startups and sales tax so you know which state and local sales tax laws apply to you.
Startups and sales tax nexus
If your startup operates online, you will soon be familiar with a word all ecommerce businesses need to know: nexus. Nexus is a presence in a state sufficient to trigger the obligation to collect the state’s sales tax.
You will always have sales tax nexus in the state where your business is based. You could have nexus in another state if you employ a sales rep, have products stored in a warehouse, or solicit business through an affiliate. Educate yourself on nexus to understand the ecommerce rules for startups and sales tax.
Startups and sales tax: How do I collect and pay?
If your product or service is subject to sales tax, your next step is to register with your state’s department of revenue. This license will also allow you to buy from wholesale suppliers without paying sales tax.
Once you are registered, you will need to file sales tax returns. Be sure and file on time. Some states assess stiff penalties for late returns, even if you have no sales tax to report.
Sales tax compliance doesn’t have to slay you: let sales tax automation software be your knight in shining armor.