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Understanding Sales Tax: What Every Business Owner Needs to Know

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Sales tax is one of the most crucial parts of running a small business. It affects your finances and helps you maintain a good standing with the IRS. But if your business is operating multiple states, keeping track of varying tax rates can be challenging.

June 14, 2024
Author: NCH

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Sales tax is an essential component of running a small business. It’s one of the crucial requirements for maintaining good standing with the IRS and can significantly impact your business’s financial health.

That said, small business owners like you need to learn how to navigate sales taxes effectively. However, achieving this may seem daunting, given the varying rates and regulations in different states.

Rest assured, we’ve created a practical and easy-to-follow guide on small business sales tax, specifically for business owners like you. 

This blog will discuss the fundamentals of sales taxes and how they’re calculated. We’ll also explore how a nexus between a business and a state or jurisdiction can be established. 

Read on to learn everything you need to know about collecting sales taxes. 

What are Sales Taxes?

A sales tax is a consumption tax levied on the sale of goods or services imposed by state and local governments. Sales taxes are indirect taxes, meaning they are not paid directly to the government. 

Instead, retailers will collect the sales taxes from their customers and then remit them to a specific government entity. 

Every time consumers buy an item or service, they must pay an additional amount on top of the item’s original price. Once the item has been purchased, the retailer will deduct the sales tax from the sale and keep the remaining amount as revenue. 

They then have to report and remit all the sales taxes they collect to the government on a specific schedule. The deadlines vary depending on the state’s regulations. Some could be monthly, while others are quarterly. 

Most states collect sales taxes, except Delaware, Montana, New Hampshire, and Oregon. 

Certain jurisdictions also impose excise taxes on top of sales taxes. These additional taxes are typically levied on items like alcoholic beverages, cigarettes, and other imported goods. 

It’s worth noting that certain items are exempted from sales taxes. Examples include food, prescription medicines, medical devices, and clothing. If the clothing is relatively low-priced, it won’t be subject to sales taxes. 

How to Calculate Sales Taxes

The primary formula used to calculate sales taxes is:

(Sales tax percentage ÷ 100) × price of good or service

Let’s say you’re selling a chair in Wyoming for $75, where the sales tax rate is 4.00%. Using the formula above, the sales tax you must collect for every purchase is $3. Once you add this to the chair’s original price, its final cost would be $78.

Calculating sales taxes is relatively as long as you know your state’s rates and collection requirements. 

How Much is The Sales Tax in Nevada?

As of this writing, Nevada’s sales tax rate at the state level is 4.60%, while its local rate ranges from 0% to 3.665%. The local rate range combines the base state rate and the mandatory local rate, which varies from jurisdiction to jurisdiction. 

In total, the state’s tax rate range is between 4.6% to 8.265%. 

Understanding Sales Tax Nexus

If you’ve done prior research on small business sales taxes, you’ve most likely heard the term “Nexus.”

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Nexus refers to a concept determining which businesses must collect sales taxes in a specific state. It’s generally defined as having a physical presence or a connection in a state or jurisdiction. 

Initially, a nexus will only be established if a business has a physical presence in one state. For instance, if your business has offices in Wyoming and Nevada, you must collect sales taxes in both states. 

But aside from a physical nexus, three other types of nexus could create a connection between a business and a state:

Economic Nexus

An economic nexus can be created when a business reaches a certain level of economic activity in a state. 

Economic nexus laws were created in response to the Supreme Court’s ruling in South Dakota v. Wayfair, which mandated businesses to collect and remit sales taxes in states that conduct more than 200 transactions or have gross sales worth $100,000 annually. 

Affiliate Nexus

An affiliate nexus is created when a business is affiliated with an organization with a physical presence in another state. For example, if your Nevada LLC has a Wyoming subsidiary, you must collect and remit taxes in Wyoming. 

Click-through Nexus

A click-through nexus can be established when a business has a third-party seller or referral agent in another state. 

According to this law, businesses that pay commission or referral fees to a third party must collect and remit sales taxes in the state where the third party has a physical presence. 

Understanding how nexus is established is crucial, especially if you have transactions in multiple.  

Failure to comply with state and local tax laws could result in multiple penalties and interest charges. These fees can be heavy and could stack up quickly, so it would be best to determine which states you have a sales tax obligation with right from the start.

But before collecting small business sales taxes, you must get sales tax permits in each place where your small business has a nexus.

The process for getting a sales tax license may vary from one state to another, but overall, it’s relatively easy. It typically requires you to provide information about your business, such as your federal tax ID number, business type, and contact information. 

Get Help With Your Small Business Sales Taxes

Getting sales taxes right the first time can be challenging, especially if you’re a first-time business owner. Navigating them would require a deep understanding of their nuances. Fortunately, you can always seek help from a professional like NCH’s tax specialists. 

NCH is one of Nevada’s leading business formation service providers. We offer a wide range of services that can help your small business. 

We have a team of tax specialists who can help you easily navigate the complexities of small business sales taxes. Whether you’re unsure which products or services are taxable or need guidance on collecting and remitting taxes properly, our experts are here to provide personalized support tailored to your business needs.

To learn more about our services, visit our website here or call us at 1-800-508-1729 to schedule a consultation.

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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