Sales Tax vs. Income Tax

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Today, I’m diving into the topic of Sales Tax vs. Income Tax and emphasizing why it’s so important for you to know the difference. 

Join me in this episode, to learn more about the differences between sales tax and income tax and how it can affect you as an entrepreneur.  

Also mentioned in today’s episode: 

• The main differences between sales tax and income tax 11:13

• Registration and filing requirements 13:49

• Sales tax filing process 16:00

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Links:

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Watch YouTube video version

Sales Tax for Artists Q+A with Rose Lulis

I’m an income tax specialist, but I often get questions about sales tax. So I called on accountant Rose Lulis to share some of her deep knowledge of sales tax. Rose and I both work with clients all over the country, but we are both based in Asheville, NC, so that’s where we talked, and we used some local examples. Here’s my interview with Rose Lulis.

HC: Rose, thank you so much for sharing your wisdom with us. Many of my clients are sole proprietors, doing everything on their own. What is the best way for a small-budget craftsperson or artist to get a handle on sales tax?

RL: It’s best that you speak with a CPA or an accountant to be certain you’re conforming to your state’s sales tax requirements and to determine where you may have sales tax nexus.

If you don’t have the resources available to do so, look for continuing education classes at your local community college that include accounting, bookkeeping, business and taxation. Read the class descriptions to see if sales tax is a covered topic. Classes are generally free. You can also look up sales tax training online and participate in online workshops and webinars to learn more. Also, don’t hesitate to call your state’s Department of Revenue to ask any sales tax related questions you may have. You may even have a local office somewhere near you that you can visit.

HC: I think it’s good for people to know that they really can just call the Department of Revenue to ask sales tax questions. Ok, now Rose, can we cover some sales tax basics?

RL: Yes. So, states make their own sales tax laws and rules. Therefore, sales tax varies state-by-state. For example, the following five states don’t have a sales tax, while all others do: Alaska, New Hampshire, Delaware, Oregon and Montana.

You want to establish where you have what’s called nexus. If you have nexus, you are required to collect and remit sales tax. You have nexus with a state if your business has some type of presence or connection to the state. Generally, you’ll have nexus in your home state, or where your office/gallery/studio/warehouse is located. You can have nexus in other states, too. Maybe you sell artwork at fairs or markets outside of your home state. This may create sales tax nexus in additional states.

HC: I think a lot of us have heard that a recent Supreme Court case (Wayfair) made big changes in sales tax. Can you summarize the Wayfair decision?

RL: Yes. The most recent type of nexus is called economic nexus. It’s based on a Supreme Court case called, “South Dakota v. Wayfair, Inc.” On June 21, 2018, the Supreme Court ruled that remote sellers are not required to have a physical presence in a state to create sales tax nexus in the state.

HC: What did internet sales tax look like before Wayfair vs. now?

RL: Before this ruling, sales tax nexus was based on where businesses had a physical presence. Based on this ruling, many states are now requiring businesses to collect and remit sales tax if the businesses have a certain number of transactions in the state and/or hit a specific sales total. Legislation has already changed in about half the states based on this ruling. For example, the North Carolina Department of Revenue issued a directive on August 7, 2018, stating that remote sellers with gross sales that exceed $100,000 sourced to NC or have (200) or more separate sales transactions sourced to NC in 2017 or 2018, are required to collect and remit sales tax to North Carolina, effective 11/1/18.

(Here’s a link to the Sales and Use Tax directive issued on August 7, 2018: https://files.nc.gov/ncdor/documents/files/sd-18-6_0.pdf )

HC: It seems like the states are reacting incredibly fast to the Wayfair decision, and new rules keep cropping up. How do I find updates about new sales tax legislation?

RL: It only took from June 21 to August 7 for the state of NC to issue its directive. I found two great resources for artists, with links to all the states’ new legislation:

https://blog.taxjar.com/economic-nexus-laws/

https://www.salestaxinstitute.com/resources/remote-seller-nexus-chart

HC: This seems pretty complicated. Are the definitions at least the same across the different states?

RL: Unfortunately, no. Regarding economic nexus, the definition of “remote seller” may vary state-by-state. For example, in North Carolina, a remote seller is defined as a

“…retailer, by purposefully or systematically exploiting the market provided by this State by any media-assisted, media-facilitated, or media-solicited means, including direct mail advertising, distribution of catalogs, computer-assisted shopping, television, radio or other electronic media, telephone solicitation, magazine or newspaper advertisements, or other media, creates nexus with this State.”

Whereas, in another state such as Maine, a remote seller includes,

“…a person selling tangible personal property, products transferred electronically or services for delivery into this State.”

HC: Yikes. Let’s get back to some sales tax basics. Can you explain destination-based vs origin-based sales tax?

RL: Sure. The question is whether you have nexus in an origin or destination-based state when it comes to sales tax. For example, of the 45 states that have a sales tax, 11 of them are what’s called origin-based states for sales tax purposes: Arizona, California (mix of origin and destination-based), Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah and Virginia. It’s pretty straightforward if you’re located in an origin-based state.  You collect sales tax based on the sales tax rate(s) of your selling location.

If you have nexus in a destination-based state, you’re required to collect sales tax based on where your artwork or pieces are being delivered, or on the buyer’s location.

HC: Ok. Let’s say I’ve figured out whether I’ve got nexus in an origin-based state or a destination-based state. Now how do I pay?

RL: In order to report and pay sales tax to the states you have nexus in, you will register with the state’s taxing authority, which is typically called- [State Name] Department of Revenue. Oftentimes, you can register online and report; and pay sales tax online, as well. You’ll be assigned what’s called a sales tax filing frequency when you register for your sales tax account. Filing frequencies are generally based on how much you sell, which is tied to how often you are required to report and pay sales tax: monthly, quarterly or annually. And if you have a period with zero sales, you need to file a zero sales tax return with your state to avoid any potential penalties or issues.

HC: I think people get tripped up on this detail, so I want to repeat it: If you have a period with zero sales, or a period with strictly non-taxable sales (like for services, which are mostly not subject to sales tax), you still need to file a sales tax return. Meaning, you need to file a sales tax return even if you have no sales tax obligation, just to report the fact that you have no sales tax obligation. And there can be penalties if you don’t do this.

RL: Yes. A fabulous sales tax resource for remote or online sellers is TaxJar.com. If you sell via Amazon, Etsy, PayPal, Shopify and several other channels, you can sign up with TaxJar, and it not only manages your sales tax, but also helps you determine where you have economic nexus. It syncs with your selling channels and generates sales tax reports for every state. You receive a 30-day free trial. I’m not affiliated with TaxJar but have read and heard great things about the service.

HC: Yes, I have to say, I love Tax Jar. They have great articles about sales tax, and you can look stuff up by state. It’s a great resource, even if you’re just doing research.

RL: Yes. But it’s best for remote sellers: You can’t use TaxJar for everything.

HC: That’s a good segue. I want to ask you to talk us through some common scenarios. We’re talking now in Asheville, NC, which is home to some amazing craftspeople. So let’s take an example of a ceramic artist selling work online to people in Asheville.

RL: Let’s talk about nexus first. If you are not an NC resident, then you must consider economic nexus now. So - if you’re a remote seller making sales sourced to NC-- you first have to determine if you have economic nexus. And remember, the definition of remote seller varies state-by-state. In NC, it can be someone selling via computer, radio, television - it’s all encompassing. This applies to you if you don’t have a physical presence in NC and you have either 200 or more separate sales transactions or at least $100,000 in sales sourced to NC in a calendar year.

If you are an NC resident, since NC is a destination-based state for sales tax purposes, you’d charge sales tax for sales to NC buyers.

Once you know if you have economic nexus, you need to ask yourself “what is the sales tax law of the place I’m going to be selling?” Usually, you do have to collect sales tax. There is typically a form the artist can download from the county or state level.

So let’s take a different scenario - say our Asheville ceramic artist is doing a craft fair in Clayton County GA. The artist should research Georgia’s sales tax laws on the Georgia Department of Revenue’s website or call the state’s Department of Revenue. Most state sites include sales tax FAQs, which are very helpful. Upon doing this, the artist will learn that he/she must collect sales tax during the craft fair and report total sales from the craft fair to the Georgia Department of Revenue, as well as pay the applicable sales tax due on the craft fair sales. The Georgia Department of Revenue provides a form called, “Miscellaneous Sales Event,” for out-of-state sellers. This varies state-by-state. Again, it’s always a good idea to reach out to the applicable state’s Department of Revenue or do your own research online regarding sales tax before any special sales events.

HC: I’m glad you’re reminding people that they can just call. Let’s go back to our Asheville-based artist, and now let’s say she’s going to do The Big Crafty right here in Asheville.

RL: She would simply charge sales tax based on the Buncombe County sales tax rate (this is a destination-based state, so we charge based on buyers’ locations, and The Big Crafty takes place here in Asheville).

HC: Great. What about if this same artist goes to The Big Crafty in Atlanta?

RL: Call the Georgia Department of Revenue and ask what form you need to complete to remit sales tax to Georgia for this special event (most likely the same “Miscellaneous Sales Event” form mentioned earlier). Follow their instructions. You need to call before the fair. You need to be sure you’re charging enough and collecting the correct sales tax.

HC: I want to clarify for everyone what you mean when you say “remit” and “collect.” Sales tax is different from income tax. In income taxes, you earn money, and are taxed on that money, which you then pay out of your earnings. But sales tax is totally different - you never earn sales tax. You just collect it on behalf of the state. Then you remit it back to the state. We use the words “collect” and “remit” rather than “earn” and “pay” because unlike income tax, sales tax is never your money.

RL: Exactly. We’re just acting as a representative. We don’t report it as income. Sales tax is not income - we just collect it for the state and remit it back to the state.

HC: So how would you handle it from a bookkeeping standpoint then?

RL: We never report sales tax we receive as income - we keep it separate. What we do in the bookkeeping world is assign it to an account called “sales tax payable.”  It’s called a liability account, because we owe it to the state. It would not be reported as a business expense. We simply track what we’ve collected for a given period. It’s important to track it. But we must keep it separate from income.

HC: I feel this points to good bookkeeping. And the need for it.

RL: Yes. You need to get your infrastructure set up right and work with a competent accountant to do so. It’s a whole new ballgame for some artists and sole proprietors who may be used to no bookkeeping system or relying on hard copies of receipts and docs, or Excel. And, it can be challenging to find the right fit with an accounting professional who not only understands your unique business requirements, but also cares enough to connect with you in terms of helping you learn and grow with your business. So do the work up front in setting up an efficient, effective bookkeeping system with a good chart of accounts.

HC: I’d like to highlight what you just said. Taking the time and spending the money to get your books set up correctly at the beginning sets you up for success down the road. A lot of artists try to DIY their books  even though they don’t know how to correctly set up a chart of accounts. When they do this, they end up tracking things incorrectly for a potentially long time. Then, they end up paying a bookkeeper a lot more down the line to fix years of bad books than they would have if they just made a small investment up front. It’s much cheaper to set up a good system and use it than it is to jury-rig a system and pay someone to fix all the mistakes it causes along the way.

HC: What does this crafter we’ve been talking about do for an online setup?

RL: I would refer them to TaxJar in this instance. It’s a good starting point, and it’s very readable - someone who knows nothing about sales tax will have a good level of knowledge and comfort. If they don’t have all the info they need, they’ll get links to articles/resources they need. Additionally, you can use the TaxJar service for online selling - it’s a fabulous resource. It takes all the think work out of it. Ignorance is not bliss when it comes to tax. As a business owner, it is our responsibility to research tax and sales tax laws to be sure we’re conforming. As business owners, we’re choosing to go into the businesses we’re in. Worth mentioning is that I may work on your taxes, but at the end of the day, you - the business owner - are the one signing your tax forms, and so we can’t use ignorance as an excuse if something is questioned. And artists should have great working relationships with the accountants, tax preparers or bookkeepers they’re so critically relying on for education, information and support.

HC: You’re bound by the laws whether you’re aware of them or not. So what do I need to do as a seller, when I make a sale?

RL: You need to give a receipt, listing sales tax separately from the items that were purchased. Square will email the buyer a receipt. Depending how you have your POS set up, you email a receipt to the buyer.

HC: What’s the best practice for a cash sale? A lot of craft fairs deal in a lot of cash.

RL: Protect your cash - you should use a locked box. But we definitely need to give a sales receipt that breaks out the sales tax paid. That pad you can buy at Staples is fine for receipts. As long as the seller keeps a copy and gives a copy to the buyer, we’re fine.

HC: Rose, you’re a fountain of knowledge. Thanks so much for sharing your wisdom on sales tax.

Rose Lulis is a dog lover, hiker, antiquer, and a hobby artist. She’s also an accountant with 15+ years of accounting, management, sales and startup experience, providing remote, virtual and outsourced accounting and bookkeeping services to creatives across the country. Her specialty is professional service providers (architects, engineers, and consultants) taxed as S corps with over 250k in yearly gross revenue. She teaches Small Business Bookkeeping, Business Formation and QuickBooks Online at A-B Tech Community College in Asheville, North Carolina. She specializes in QuickBooks Online. You can find her at www.roselulis.com.