Sales Tax for Small Businesses

Sales tax is one of the most common compliance obligations small businesses face — and also one of the most misunderstood. Unlike income tax, sales tax is collected from customers and passed along to the state.

This article explains how sales tax works for small businesses, when you are required to collect it, and what to watch for as your business grows.

🟢 HOW SALES TAX WORKS FOR SMALL BUSINESSES

Sales tax follows a simple process:

🔹 A customer purchases a taxable product or service

🔹 Sales tax is added at checkout

🔹 The business collects the tax

🔹 The business remits the tax to the state

🟢 WHEN A SMALL BUSINESS MUST COLLECT SALES TAX

A small business is generally required to collect sales tax if it has sales tax nexus in a state.

Nexus means having a sufficient connection to the state, which does not always require a physical location.

🟢 WHAT IS SALES TAX NEXUS?

Sales tax nexus determines whether a state can require you to collect sales tax.

Small businesses create nexus through activities such as:

🔹 Operating from a home office or storefront

🔹 Storing inventory in the state

🔹 Having employees or contractors in the state

🔹 Selling enough products or services into the state

🔹 Selling through online marketplaces

Each state sets its own nexus rules.

🟢 PHYSICAL NEXUS VS. ECONOMIC NEXUS

There are two main ways nexus is created:

🔹 Physical Nexus

Created when your business has:

🔹 An office, store, or warehouse

🔹 Inventory stored in the state

🔹 Employees or representatives working there

🔹 Economic Nexus

Created when sales activity crosses state thresholds, such as:

🔹 A specific dollar amount of sales

🔹 A certain number of transactions

Many online sellers create economic nexus without realizing it.

🟢 WHAT SMALL BUSINESSES NEED TO TAX

Not every sale is taxable.

Commonly taxable items:

🔹 Physical goods

🔹 Some digital products

🔹 Prepared food and beverages

Often non-taxable or treated differently:

🔹 Services

🔹 Groceries

🔹 Medical or prescription items

Taxability varies by state.

🟢 ONLINE SALES AND MARKETPLACE PLATFORMS

Online selling adds complexity.

Key points for small businesses:

🔹 Online sales may still be taxable

🔹 Marketplaces may collect tax on your behalf

🔹 Sellers may still need to register and file

You should confirm obligations even if a platform collects tax.

🟢 REGISTERING AND COLLECTING SALES TAX

Before charging sales tax, small businesses generally must:

🔹 Register with the state tax authority

🔹 Obtain a sales tax permit

🔹 Set up correct tax rates

🔹 File sales tax returns on schedule

Filing frequency depends on sales volume and state rules.

🟢 COMMON SALES TAX MISTAKES SMALL BUSINESSES MAKE

🔹 Failing to register after establishing nexus

🔹 Charging incorrect tax rates

🔹 Forgetting local or district taxes

🔹 Mixing sales tax with business income

🔹 Missing filing deadlines

Sales tax issues often grow over time if not addressed early.

🟢 WHAT HAPPENS IF SALES TAX IS MISSED?

If sales tax is not handled correctly, states may assess:

🔹 Back taxes

🔹 Penalties and interest

🔹 Audits or notices

Sales tax is taken seriously because it involves customer-collected funds.

🟢 A PRACTICAL RULE OF THUMB FOR SMALL BUSINESSES

🔹 Selling products → review sales tax rules

🔹 Selling online → check nexus regularly

🔹 Expanding into new states → reassess obligations

🔹 Unsure → review before collecting or filing

Managing sales tax proactively prevents issues later.

🟢 NEED HELP WITH SALES TAX FOR YOUR BUSINESS?

Sales tax rules vary widely and change often.

At Pacific Change, we help small businesses:

🔹 Determine where sales tax applies

🔹 Understand nexus rules

🔹 Register and file correctly

🔹 Resolve past sales tax compliance issues

If you’re unsure how sales tax applies to your business, we’re happy to help.