How to set up sales tax for a US small business

Need a quick figure? Use the free US sales tax calculator (every state's base rate, plus your local rate) or the GST/HST calculator for Canada.

Where you have to collect

US sales tax is set by states, and often by counties and cities too. There is no federal sales tax. You must collect a state's tax only if you have nexus there: a connection strong enough for the state to require it.

• Physical nexus: an office, shop, warehouse, employees, or inventory stored in the state. Your home state is almost always one.
• Economic nexus: since the Supreme Court's South Dakota v. Wayfair decision on June 21, 2018, states can require out-of-state sellers to collect once their sales into the state pass a threshold, even with no physical presence.

Thresholds differ by state. Three examples, from each state's revenue department:

Sales through a marketplace such as Amazon or Etsy are usually taxed by the marketplace, but some states still count them toward your threshold. Track your sales by state from the start so you notice when you get close.

Registering and your rates

Register with each state's revenue department before you collect any tax; collecting without a permit is not allowed. Registration is usually free and online. The state gives you a permit or account number, a filing frequency and access to its rate information.

The rate a customer pays is often several taxes added together: state, county, city and special districts. Most states tax at the rate of the place where the customer takes delivery (destination-based). A few use the seller's location for sales within the state. Your state's site will tell you which, and most publish a rate lookup by address.

In your software, set up each tax once with the agency it is paid to, then combine them into a group for each location you sell to. That way invoices show one rate to the customer while you still know how much belongs to each agency.

Taxable, exempt and resale sales

Physical goods are generally taxable. Services, food, clothing, software and shipping charges are treated differently from state to state. Look up your state's rules for each kind of thing you sell and mark every product or service in your item list as taxable or not.

Some customers do not pay tax at all:

• Resellers buying goods to resell give you a resale certificate.
• Exempt organisations such as many charities, schools and government bodies give you an exemption certificate.

Collect the certificate before or at the time of the sale, check it is complete, and keep it on file. In an audit, an exempt sale without a valid certificate is treated as a taxable sale you failed to collect on, and the tax comes out of your pocket.

Filing and paying

• The state assigns your filing frequency, usually monthly, quarterly or annually depending on how much tax you collect. New registrants often start quarterly.
• File a return for every period, even when you owe nothing. A missed zero return can still bring a penalty.
• The return usually asks for gross sales, exempt sales, taxable sales and the tax due, often broken down by county or city.
• Due dates vary; many states use the 20th of the month after the period. Check each state's calendar.

Recording it in your books

Sales tax you collect is not your income. It is money held for the state, so it belongs in a liability account such as Sales Tax Payable.

Before each return, run a sales tax liability report by agency and check that the Sales Tax Payable balance matches it. If it does not, look for invoices with the wrong rate or items marked taxable by mistake. Then make the payment from that report so the liability goes back to zero. Make this part of your monthly closing checklist. Selling into several states, or selling services and digital products, is where an accountant's review is worth paying for.