Handbook / Licenses and permits

Sales tax permits: when a small business needs one and how to apply

Sales tax is collected by businesses on behalf of states and, in many places, local governments. If you sell taxable goods or services, you are acting as the collector, and you usually need a permit, sometimes called a seller's permit, sales tax license or certificate of authority, before you start. This guide explains when you need one, how registration works and the obligations that follow. Because sales tax is set by each state, treat it as a map of the questions to answer, then confirm with your own state.

Who sets the rules

There is no general federal sales tax. Each state that has one decides what is taxable, at what rate, who must register and how often to file, and many allow local add-on taxes. The SBA advises checking with your state about whether you need a state tax ID and what taxes apply. In practice, the place to start is your state's Department of Revenue or taxation agency.

Do you sell something taxable?

Start with your products and services:

• Physical goods are taxable in most states that have a sales tax, with exemptions that vary, such as some food items.
• Digital products such as downloads and software are taxable in some states and not others.
• Services vary widely. Some states tax few services; others tax many, such as certain repairs, cleaning or personal services.

Write down each thing you sell and look up how your state treats it. Mixed jobs, where you supply parts and labour, can have special rules.

Where do you have to collect?

You normally need to register in the state where you have a physical presence: your home base, a shop, inventory or staff.

Selling into other states is different since 2018. In South Dakota v. Wayfair, the Supreme Court considered a South Dakota law requiring out-of-state sellers to collect sales tax if, each year, they delivered more than $100,000 of goods or services into the state or made 200 or more separate transactions there. The Court overruled the earlier physical-presence rule. Since then, states set their own economic thresholds for remote sellers.

So if you ship products to customers in other states, keep track of how much you sell and how many transactions you make in each, and check each state's threshold.

Marketplaces. If you sell through an online marketplace, the marketplace often collects and remits for you in many states. Check the marketplace's tax pages and the state's rules for sales you make outside it.

How to register

Registration is usually online and often free or low-cost, though some states charge a fee or require a deposit. Expect to provide:

• your legal name and business name
• your structure and SSN or EIN
• business address and start date
• what you sell
• estimated sales

For sellers registering in several states, the Streamlined Sales Tax Governing Board offers a central registration for its member states, listed on its site.

Register before your first taxable sale.

After you register

Collect. Charge the correct rate on taxable sales. Rates may depend on where the customer receives the item.

File. States assign a filing frequency, often monthly, quarterly or annually, based on your volume. You may need to file even when you made no taxable sales.

Remit. Pay the tax collected by the due date. It is the state's money, not yours. Keeping it in a separate account avoids spending it by accident.

Keep records. Keep invoices, receipts and exemption or resale certificates that support untaxed sales. Your bookkeeping should separate sales tax collected from your income. The guide on bookkeeping covers setting up records.

Buying for resale

Many states let registered sellers buy items they will resell without paying tax at purchase, using a resale or exemption certificate. The details are set by the state, and the certificate must be used correctly.

Common mistakes

• assuming services are never taxable
• starting sales before registering
• ignoring sales into other states as they grow
• spending collected tax before it is due
• missing a zero return

Related permits

A sales tax permit is not a business license. You may still need a local license, a home occupation permit and professional licenses. The guide on business licenses explains how to find them.

List what you sell, check your state's rules, register before the first taxable sale, and treat collected tax as money held for the state.