Do you need to collect taxes when you sell things?

What types of taxes are involved in making sales?

In most countries, including the United States and Canada, businesses are generally required to collect and remit taxes when they sell goods or services. The specific taxes you need to collect depend on your location and the type of products or services you offer. Here are some taxes you may need to collect while running your small business:

Sales tax

Most states in the U.S. deal with sales tax, which is a tax that businesses collect from customers at the point of sale. Once a sales tax is collected from a small business, it is then remitted to the government. Sales tax rates and regulations will vary based on where your business is located, and some places may not have a sales tax at all. Only five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not require businesses to collect sales tax.

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Value-added tax (VAT)

VAT is a consumption tax that is charged on the value added to goods and services at each stage of production or distribution. Businesses collect VAT from customers and pass it on to the government. This type of tax is common in many countries outside of the United States. If your business makes and sells products in other countries, you may need to deal with VAT.

Use tax

In cases where sales tax or VAT hasn’t been collected, some regions impose a use tax on the buyer. Businesses may be required to inform customers of their use tax obligations if they sell products into a region where they’re not registered to collect sales tax.

It’s essential to understand the tax laws and regulations that apply to your specific business and location. Failure to collect and remit the required taxes can lead to legal and financial consequences, including fines and penalties.

So, do you need to collect sales taxes?

In most cases, if you have a nexus in the region where you are selling, you will need to collect sales tax. Any business with a nexus, defined as a legal or physical presence or significant economic activity in a region, is required to collect sales taxes. If you sell products in other states or countries, you will likely be subject to that particular region’s tax laws. Check each state’s sales tax laws before making sales there.

How do small business owners keep track of taxes on sales?

To ensure compliance, many businesses use point-of-sale systems or e-commerce platforms that automatically calculate and collect the appropriate taxes based on the customer’s location and the type of product or service sold. Additionally, consulting with a tax professional or accountant can help you navigate the complexities of tax collection and remittance to stay in compliance with the law.

Learn more about taxes before starting your small business

The specific rules and requirements regarding tax collection can vary widely depending on your location and the nature of your business. Before you start making sales, ensure you know how to manage your business’s taxes and finances. Browse through our budgeting tips to learn more about taxes, including payroll taxes, tax returns, quarterly taxes, and more.