What you need to know about sales tax

As small business owners, we all deal with a variety of taxes. From payroll taxes to sales taxes, I know it can get confusing! It can be easy to think that because you’re used to paying sales tax, that it is also easy to understand for your business. Many clients discover, however, that sometimes understanding sales tax and how it relates to their business can be one of the more complicated financial scenarios. 

Let’s take a look at some of the most common questions I get about sales tax. Most of my clients are in Arkansas, so I will use our state as an example. If you are reading this from outside Arkansas, you need to confirm details specific to your state. 

How much is sales tax? 

You have probably noticed on your receipts that you can purchase an item in one city and your total is slightly different when you buy the exact same thing in a different city. That is likely due to the different sales tax amounts. 

According to the Arkansas Economic Development Commission, “the Arkansas sales tax is 6.5 percent of the gross receipts from the sales of tangible personal property and certain selected services.” It should be noted that the word “sale” also includes rental or lease of the tangible personal property. 

Each county and city can add their own taxes on purchases, which makes the overall tax rate much higher than the state’s 6.5 percent. That’s why a fast food meal purchased in one part of the state will cost at least a few cents more in another part of the state, even if the base price is identical. 

For example, here in Fayetteville, Arkansas, we pay a state sales tax of 6.5 percent, Washington county sales tax of 1.2 percent, and Fayetteville city sales tax of 2 percent for a total of 9.75 percent. In Bentonville, they pay state sales tax of 6.5 percent, Benton county sales tax of 1 percent, and Bentonville city sales tax of 2 percent for a total of 9.5 percent. 

Each city, county, and state in the US has a different sales tax rate. 

Do I need to charge sales tax? 

This depends entirely on what your company offers and the state where you live. However, every governing body in the US has their own laws regarding what is taxed and what is not. 

As I stated above, most physical, tangible products are subject to sales taxes in Arkansas. That means, if you sell any kind of product, you must charge and remit sales tax unless the item is listed as tax exempt on the list provided by the AEDC. 

In Arkansas, most services are not taxed at all. Here is where it can get confusing. For example, if you are a hair stylist, you do not need to charge sales tax for your hair styling services. If you sell hair products like combs or shampoo, you need to charge sales tax on those items to be submitted to the state. Be careful that your point of sale program keeps track of which items must be taxed and what doesn’t have to be so you don’t overcharge or undercharge your clients! 

What sales tax rate do I charge when I’m shipping something?  

The sales tax rate you pay is based on the city where the product is delivered. So if your business is located in Fayetteville, Arkansas and you ship your product to Little Rock, Arkansas, you will pay the sales tax rate in effect for Little Rock. 

Similarly, if you are doing a trade show in a city where your business is located, you charge the tax rate of the city where the event is happening, not where your business is located. 

What sales tax rate do I pay when purchasing items for my business? 

If you are purchasing from a physical store, you would pay whatever the sales tax rate is in that locale. The reason I put this question in this blog is, that there is often confusion about how to handle sales tax for online sales. If you are purchasing items online for your business, you should expect your state’s tax rate, not where the business you’re purchasing from is located. 

How much do I charge for online sales?

Whether you’re an Etsy seller or selling other products from your online store, you need to know which sales tax rate to charge. This can be complicated and it’s best to check with each state where you do business but I will share the basic answer here. 

Essentially, if your business has a physical presence, or “nexus”, in a state, you must collect applicable sales taxes from online customers in that state. 

Each state defines “nexus” differently so if you aren't certain whether you have a sufficient presence in a state for sales tax purposes, check with that state's taxing agency.

A local example of online sales going to multiple states is Amazon. For many years, Amazon did not charge sales tax to purchases going to Arkansas. In 2017, they started charging sales tax that is remitted to Arkansas for items purchased from here. 

Where and how do I pay the sales tax that I collect? 

You need to start by registering with the Arkansas Department of Finance and Administration. Their website has a lengthy and informative section on sales tax in the state including how to register, when to pay, how much to charge, etc. 

Ultimately, it is up to the business owner to collect and remit the sales tax on purchases made from their business. 

Is this as clear as mud?

Yes! If these questions make your head spin, you are not alone. Sales tax is complicated. If you want help figuring out if you owe sales tax, how much you might owe, or need help picking software to handle it for you, send me an email and let’s talk.