If you’ve done any research about starting an online boutique, you’ve probably come across references to a “resellers permit” or “sales tax license”.
Based on where you live, those terms can be interchangeable. But if and when you’d need a permit or license can be confusing.
So in this post, we’ll look at what sales tax is, why it’s important, and when you should charge sales tax as an online boutique.
What Is Sales Tax?
Based on the state you live in, sales tax is a tax on retail purchases. Individual states require that retailers charge an additional tax on consumers within that state.
When it comes to selling online, sales tax should only be charged to customers who live in the same state that the business is legally established in.
The percentage of the tax differs from state to state (if they require it at all). And that range is dependent on many factors that relate to what that particular states needs to spend on.
So it’s important to know if your state requires you as a retailer to collect and remit (or pay back) sales tax.
What is Sales Tax Used For?
Sales tax is used to pay for state and local budget items. These items usually fall within seven key categories: elementary and secondary education, public welfare, higher education, health and hospitals, highways and roads, criminal justice, and housing and community development.
Based on where you live, you state and local government officials can use it for things like school programs, Medicaid, police departments, or the court system. These are essential services provided to those who live in a particular municipality. So you business can have a direct hand in supporting the development of your community.
How Is Sales Tax Calculated For Online Boutiques?
Depending on the tax rate on particular items in your state, sales tax is a percentage of your retail price added on to that price.
So what you charge a customer can be represented by this simple formula:
Retail Price x (1 + Sales Tax Rate) = Total
In this formula, the sales tax rate would be the percentage over 100. For example, a 7% sales tax rate would be .07 when you plug it in.
So a top that retails for 24.99 with a 7% sales tax rate would cost $26.74.
And the difference is what you owe your state government.
Now you don’t have to do the math on your own!
Depending on the eCommerce platform/payment processor you use, sales tax can be automatically determined when a customer adds their shipping address to the checkout form.
Your job is to make sure that you don’t spend the tax that you collect. Because most states require that you connect your business bank account to your state government’s department of finance. That means they’ll know what money is coming into your business.
All you have to do is to make sure you set the taxes you collected aside when it is time to remit it to your state.
Do You Only Charge Sales Tax for One State?
Here’s where it gets tricky. So let’s work through an example together.
When you start, you will only be charging sales tax to people who live in the same state as you that’s called a PHYSICAL NEXUS.
So if you’re business is in New York, you would charge sales tax to anyone placing an order with your online boutique from Brooklyn all the way to Buffalo. The sales tax rate covers the entire state that you’re shipping from and to.
Now, if you have sales over a certain value threshold in another state, that state would be considered a FINANCIAL NEXUS.
What is a nexus?
The Sales Tax Institute defines a sales tax nexus as:
“Maintaining, occupying, or using permanently or temporarily, directly or indirectly or through a subsidiary, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business.”
In easier terms, a nexus is your connection to a state.
But since eCommerce allows us to sell to people who live all across the country (and the world) you also have to be mindful of additional nexuses as you grow.
So let’s say you generate $200,000 in sales from Alabama residents.
Even though you’re based in New York — because you’ve sold $200,000 worth of goods to residents of Alabama, that state’s government would consider that you have a nexus in Alabama. And they could require your business to charge sales to any future customers in that state. And you’d also need to have a sales tax permit in Alabama as well.
So there is a scenario, depending on how big your business gets, that you may have multiple state sales tax licenses if you’ve established more than one nexus.
Collecting and Remitting Sales Tax
Now you can only charge sales tax to customers in states where you have a sales tax permit. Otherwise it would be illegal.
Since you have a permit and you are doing business, you are required to file your sales tax. Even if you haven’t made a sale yet.
Your state finance and taxation department website will have their schedule for when you have to remit the sales tax. It could be monthly or quarterly.
And remember, this isn’t money that you’re paying your state out of your own pocket. You have already charged your customers the tax. You are just setting that tax aside to pay with.
Here at Start Your Boutique, I always recommend that you add filing deadlines and payment dates to your phone calendar. Because it is your responsibility to file and pay. add all of those deadlines to your phone.