Sales Tax vs. Income Tax

Go To Great Panes, Kathryn Maloney ©2009

The first thing about taxes and your small business is that sales tax is completely unrelated to your annual state and federal income tax.

Sales tax:

Collected and regulated on a state level, so every state has its own laws that govern the collection and payment of sales tax by sellers to the state. The laws vary widely, please always contact your state directly if you have any questions or get the info directly from your state’s official website. Two examples differences:

  • Some states use the tax rate where the seller is located, some the rate where the buyer is located, and
  • Some states tax shipping while others don’t.

One thing that’s true for all states–if you don’t have a business nexus in a state you don’t have to collect sales tax for that state (nexus = physical presence, like selling from your home or doing a craft show/having a store front, or having a business rep in a state). So you collect from in-state buyers, and out of state buyers will owe “Use Tax” to their own state if the transaction would have been taxable in their state.

If your state has sales tax, you usually need to register with the state to be authorized to collect it from your customers, then you pay the state the money you collected according to the schedule the state provides you, on special forms that are only for sales tax remittance.

Most states require sellers (including hobbyists/individuals, not just “businesses”) to register before they start to sell. Some states do allow you to sell under a certain amount a year before registering, but it’s not common. For example:

  • Texas requires you to register if you sell 2 taxables items in-state within 12 months,
  • Tennessee if you sell less than $400/month and pay tax on your supplies you don’t yet have to register.

See those details here: links to state websites

Some states require sales tax be remitted monthly, some quarterly, some once a year. In some states the schedule changes depending on your sales. Your state will tell you how often you should remit it.

Income tax:

Paid by US citizens/residents and those employed in/selling from the USA at the federal level and at the state level (if the state has income tax). Due April 15.

Some states also have additional taxes for businesses–be sure to check with your state’s taxing authority for your business responsibilities.

For help getting started with what your state requires see this post:

Sales Tax & Business Registration Help
–links to official state websites–


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