Sales tax is state-driven. This means that a state imposes a sales tax on transactions that involve services and products that a business sells if that business has a nexus, or sales tax presence, in that particular state. As a small business, it’s crucial that you know if and when you must charge sales tax.
When Should You Charge Sales Tax?
The first thing you need to find out is if your state is a destination-based state or an origin-based state. A majority of states are destination-based states, which means that they impose sales taxes when a service or product is utilized or picked up. On the other hand, states that are origin-based require retailers to charge sales tax when they complete a sale.
For example, let’s say that your business is located in Utah, which is an origin-based state. You must charge sales tax, which includes states and local taxes, on any sale that you make to a customer in that state. Sorenson & Company and other Utah accountants further explain that if your business is based in Provo and a customer buys a product in Salt Lake City, you must charge the applicable Provo sales tax for the transaction.
What Products and Services Taxable?
Again, this would vary on what state your business operates in or is registered with. For example, food isn’t taxable in most states, except in Tennessee, Virginia, Arkansas, and West Virginia. In addition, prescription medications are also not taxable in most states, but non-prescription medications are taxable.
Generally speaking, a majority of states charge sales tax on almost every product, but sales tax imposed on services significantly vary from one state to another. Also, take note that state laws could and do change without ample notice. That said, it’s best to contact the Department of Revenue in your state to inquire which products and services are taxable in your state. You could also consider working with a local accountant for your tax needs.