When to Charge Sales Tax

Recently, I helped a customer launch a dumpster rental service. Customers will go a website, schedule the delivery and pick-up of the dumpster, and pay for the service through the website. In planning sessions, our customer kept wondering whether or not they had to charge sales tax on the rental.

Because I was setting up the customer's accounting system, it's crucial that I know the answer to this question. Managing sales tax is a big job. First, you have to know how much to charge by state (and sometimes, by county and/or by city). Then, you have to collect the sales tax at the time of the transaction. Finally, you have to complete sales tax reports on a state-by-state basis either monthly or quarterly. If you do business in all 50 states, this can be a whopping burden for your accounting team.

Some businesses feel they are exempt from charges sales tax in states where they have no physical presence, such as an office, warehouse, or store. (The legal term for physical presence is called "nexus.") At the same time, some states say that companies selling over the Internet are subject to the same sales tax collection requirements as any other retailers, regardless of nexus. With these two viewponts seemingly in conflict, what do you do?

Don’t assume that because it's an Internet sale, it's not subject to sales tax. With many states facing budget deficits and revenue shortfalls, laws have changed and more resources are being devoted to sales tax collection. If you rightfully owe sales tax and haven't paid it, states are within their rights to charge interest and penalties, as well as put a lien on your bank account.

Also, don't assume that you're exempt from charging sales tax because you offer a service. Many states have specific rules about charging sales tax on services if they are accompanied by the delivery of tangible personal property such as software.

If you're an out-of-state company ready to do business in a new state, the best thing to do is call that state's sales tax authority. Describe your nexus situation and the products and/or services you plan to sell. The tax authority will tell you if you need to charge sales tax and, if so, how much.

There are also third party services that automate the calculation of sales tax and the submission of your tax reports. Some of these can calculate sales tax directly in your Internet shopping cart and keep themselves updated on the latest rates, taking away much of the sales tax headache. Consider this if you don't want to manage sales tax on your own.

Finally, the rules around the collection and remittance of sales tax have changed recently as states are seeking new revenue. Sales ordinarily not subject to sales tax may now be subject to it, adding more of a burden to companies. As with any financial matter, always check with your accountant on any tax-related matter, including the collection of sales taxes. This can save you a lot of headaches down the road.