What types of taxes will I need to collect from my customers?
The main type of tax you will collect from customers is sales tax, unless you conduct business in one of the five states that don’t require these taxes (Alaska, Delaware, Montana, New Hampshire, and Oregon). Sales Tax 101 is a good place to read up on the things you need to know before you begin, like if your state requires a sales tax permit, and where and when you should submit the taxes you collect.
What tax rate do I use?
Every state has a different tax rate, and some states allow additional local sales taxes to be collected by individual cities. Sales tax will generally vary depending on the type of product you are selling. For example, groceries will normally be taxed at a lower rate than food sold at a restaurant. Prescription drugs, alcohol, cigarettes, and clothing are other items that would be taxed at varying rates. Check your state government website, or this website that lists all states, to find your state and local tax rates.
Once you know your tax rates, you can add them to your ZipBooks invoices. Add as many different taxes as you need to, based on additional excise taxes your state may require (like fuel tax, cell phone tax, etc.). Excise taxes may be passed on to consumers by raising the price of the product sold, instead of charging it as a tax. Check your state website to learn about all the details.
What is Use Tax?
Since sales tax varies by state, some companies that sell products online don’t charge sales tax to customers who live outside of their state (check here to see if you qualify as one of these). This is where Use Tax comes into play. Consumers are required to pay use taxes on personal property they use or store in the state they live in. These two taxes are mutually exclusive, meaning that one or the other should be applied to each sales transaction, but not both. If someone paid sales tax on a boat they bought, they wouldn’t pay use tax on it. You would generally not include use taxes on customer invoices, since you, as the business owner, don’t carry the responsibility to pay this tax.
Let’s say you sell computer equipment online. You have customers all over the world, and you don’t have a physical location in any state, so you don’t charge sales tax. Your customers would need to keep track of all the items they purchase from you, and then pay use taxes to their own states at tax time. But you yourself would need to pay use taxes on the computer equipment that you purchased for your business from an online vendor in Japan.
What do I do with the taxes once I’ve collected them?
Each state has different requirements, but in general, you’ll need to pay the sales taxes you collect either quarterly or monthly. Check out your state tax website (like this one for Utah business owners) to get all the details. Make sure to pay attention to due dates so that your state tax commission doesn’t slap you with fines for late payment.