Episode 69: Sales Tax Made Simple for Creative Entrepreneurs

Samantha Eck (00:34)
You’re listening to the Creative Minds Smart Money podcast. And today’s topic is all about sales tax. And you might be thinking, okay, Samantha, you are talking to a bunch of service providers. What do we have to do with sales tax? But honestly, even service providers sometimes have to pay sales tax. So I want to be honest with you that sales tax is confusing as heck. What do you charge it on?

Who do you collect it from and why does every state seem to have its own language when it comes to this specific type of tax? First of all, you are not someone who is a bad business owner for feeling overwhelmed by this because understanding how sales tax works is one of the best ways to protect your business and your piece. And today we’re gonna break down what sales tax actually is when you need to collect it, what varies by state and the tools that can help and how to stay compliant without losing your brain, okay? So first of all,

What is sales tax and who does it apply to? So sales tax is a state level tax you collect from customers and remit to the government. So it is your state government. is not the federal government. is a state by state policy. It is also a local policy. So it could be your county that also charges you a sales tax. It does apply to taxable goods and sometimes services, depending on your state, sometimes services are not taxed at all. In Texas, there’s a lot of services that aren’t taxed, but there are some services that are also taxed.

it is a very good idea to kind of like research that.

Okay. So for sales tax, you don’t pay it out of your pocket. Your client does. You’re the middle person, not the one footing the bill. Essentially you’re taking the sales tax that they would pay and paying it to the IRA. Again, it gets really confusing. but you should be charging your client for it. I have some clients who choose not to and who choose to foot the bill themselves, but there is also the option that you can charge your clients for it. just depends on, you know, if you work that into your pricing or not, however you want to account for that.

But most important, the most important thing that you must understand is that you must register to collect sales tax first. You don’t want to collect before you’ve registered because you’re essentially a tax collector for your state. It’s annoying. It is, but it’s true because for example, one of my social media manager clients, we collect sales tax for her, clients that are only in Texas because that’s where she is taxable. And so then we pay that every month. So she’s the tax collector for the sales tax.

And the sales tax helps run your local economy, your state’s economy, your local economy, everything like that. So why does sales tax depend on your state? might be like, okay, well, why isn’t there like a standardized process for sales tax? First of all, there is no federal sales tax. Okay. So it’s all state and local states do vary on what’s taxable again, products, digital goods, services, they can all be taxable. It just varies by state. ⁓ so you’re going to have to do a little bit of research on that, but it really does depend. Okay.

So tax rates, which could include your local, your city, your county tax. There’s different tax rates for each county sometimes. There’s different tax rates for local. For example, I work with a photographer who works in very many different counties in Texas, and he pays tax per county. So it could be the same rate. It could be 8.25 % in Texas, but it could also be 7.25%. So it does also vary on when you are required to collect. Sometimes it’s annually, sometimes it’s quarterly, sometimes it’s monthly.

So sometimes you do need someone who is specific to your country or to your country, to your state that can help you with sales tax because ⁓ people don’t necessarily know. So some good examples are digital products typically are not taxed. Physical products are. In Texas, electronic file delivery is taxable. So if you’re just delivering files electronically, it’s taxable. Local design delivered digitally might be taxable. Consulting services aren’t in New York.

So really it’s a lot of different qualifications and you have to really look into your place or consult with a CPA or whoever to make sure that you’re actually understanding your sales tax. Now, I want to talk about the nexus because the nexus is the word that kind of changes everything that we’re talking about. A nexus is your business has a connection to a state so they can require you to collect sales tax. So if you have clients across a bunch of different states, then of course it’s…

or requirement for you to collect sales tax, but it depends, right? So you have two types of nexuses. You have your physical nexus, which is where you live, work, store inventory, do events in that state. That is your physical nexus. You also have your economic nexus. So if you sell a certain dollar amount or number of transactions into a state, even if you don’t live there. So for example, if you sell a thousand, a hundred thousand dollars worth of templates to people in California, you now owe California your sales tax, even if you live in North Carolina. So you have to kind of analyze that and understand the sales tax nexus is there as well.

Most of the time if your song services things like that, you’re not going to meet that nexus.

most of the time where it comes into play is products because a lot of product-based businesses will have a lot of different nexuses, but there’s also a lot of software that you can use that will allow you to kind of like get this handled so that you don’t have to handle it yourself.

So real life examples of sales tax, things that are taxable for creative businesses. Again, these are examples. Please look it up based on where you’re at. So usually prints and albums are almost always taxable. They’re a physical product. Most physical products are taxable. Digital galleries are taxable in some states, not exempt in others. Session fees might not be taxable unless tied to a deliverable.

and then pop-up sessions or events create physical nexuses in a state. So again, you wanna keep track of those nexuses, but more often than not, you’re not gonna be paying that in that nexus, okay? For example, designers, brand strategists, copywriters, digital products may be taxable depending on delivery method and state rules. Printed deliverables are almost always taxable, and then mixed packages strategy and design can be partially taxable in some states, okay?

For product-based businesses like boutiques, Etsy, people makers, things like that, physical products are always taxable. It’s just a way of life. Again, like I mentioned, I think one of the only times that physical products are, and it’s like food, like in Texas, food isn’t taxable. Digital products are taxable in 30 plus different states, so you wanna make sure that you’re looking at whether your digital products are. And then shipping and handling can be taxable depending on the state. Again, that depends on the laws.

So if you’re selling on Etsy or Shopify, they may collect sales tax on your behalf, but you’re still responsible for registering and reporting. Again, there are softwares that you can kind of work with and people that you can work with to kind of get that. Course creators and digital educators, are self-paced courses are often taxable because they’re seen as a digital product. Live courses are usually not taxable because they can be seen as a service. Bundled offers, courses plus coaching could be partially taxable, and then templates and downloads are taxable in many states.

Again, just different examples of what could be taxable, what might not be taxable, okay? So how do you get set up? First of all, check if your offer is taxable in your state. The first thing I do is Google is product or service taxable in the state. So one of the first things I did with my business is bookkeeping taxable in the state and looking up like what about bookkeeping is taxable in Texas contact your state’s Department of understanding that as well. Then once you understand if you do owe sales tax, you need to register for a sales tax permit.

which is required before you collect. It doesn’t really cost anything. You should just be able to register online can pay it online. You don’t have to pay it through check. There’s usually an online portal that you can pay it through. Then charge your sales tax at checkout. So when you have a business that you’re charging for, make sure you’re charging for that. platform must support state-by-state breakdowns, add task fields to invoices or product listings. That way they can see it as a separate line item. And then track and separate it in your books. Remember, I want you to remember this, sales tax is not income.

So don’t include it in income. It’s not income. You want to keep it in a separate liability that, is a common mistake is that sometimes people put that on their profit and loss. It’s not income. It’s not a loss. It’s not an expense. It’s literally pass through. You’re collecting it. You’re passing it through to your comptroller. Don’t consider income. Don’t consider an expense. It’s not something that’s like actually, you know, physical for you, ⁓ monthly, quarterly, annually, you might have to pay and file.

It does to spend on your estate and your volume. And then of course, many states even require a return if you collected $0 called a $0 return. It’s just to let them know that you didn’t have anything that you collected during that month. Okay. So some common mistakes to avoid, obviously collecting tax before registering. You want to make sure you’re registered before you collect tax and that you have a sales tax number. when legally required, especially at in-person events, not collecting sales tax can cause you huge issues. Assuming digital products are always exempt. Again, looking it up and making sure.

spending the tax money you collect. Of course, it’s not yours, so why would you do that? And then of course, ignoring economic nexus once you start scaling. So if you are in different areas, just watching out for that nexus and making sure that you are understanding if you would owe sales tax in that area, okay? So tools that can help you to kinda calculate all this is the last thing that I wanna talk about and kind of go over. One of the best ones is TaxJar, especially for digital sellers.

Ecommerce digital sellers that have multiple states it tracks your nexus It’ll calculate your tax by location and it does offer auto filing so they’ll auto file for you doesn’t register with your state’s you still have to register and then give them the number that you have They’ll just file it for you and then obviously it’s limited use for invoice based businesses But it is great for things like Shopify will commerce etc. Avalara is another one. It is a large or is for best for larger fast scaling businesses

Does end-to-end tax automation, state registration services, it’ll pretty much do everything, but it doesn’t really fit like solo printers or service-based businesses well, because it can be overkill. So you want to think if like you’re making a lot of money in e-commerce, that could be a really good fit for you. So Shopify does work for, if you have a business on Shopify, it does automatically calculate and collects tax at checkout. You do still have to register and file and you’re still responsible for returns.

But you can track all of that in Shopify to make sure that you’re, you know, meeting nexuses and things like that. ⁓ Etsy does collect and remit sales tax for you in most states. So if you’re on Etsy, it’s already being handled for you. ⁓ the only thing you have to cover is in-person sales or other platforms, file in your home state if you’re doing local sales as well. And then for honey booked up Sado 17 hats service providers that are using invoices, that’s what this is best for. ⁓ it does let you manually add tax to your invoice, but again, you need to know.

your local rules and then you can file because it does not auto file for you. It’s collecting it but it’s not auto filing for you. For Stripe, PayPal or Square, again, this is good for service-based businesses or hybrid businesses. Again, it does let you create custom tax settings and breakdowns, but it doesn’t track a nexus or handle registration. again, that’s something you have to do manually. And then of course, you can also utilize a bookkeeper or CPA.

Anyone who sells across state lines or offers services and products can utilize someone like me or someone else who is a CBA so that they can help you flag when you need to register, file returns, ensure that you’re compliant. But they don’t file for you automatically unless obviously you’ve hired them for that. So they can keep you legal and keep it off your mental plate. So a little bit of insight into sales tax. I can’t give as deep of an insight as I would like because obviously it differs per state, but

I really wanted to make sure that sales tax is a little bit less confusing so that you can figure it out. Because once it’s set up, it just becomes a part of your backend and it lets you just scale with confidence. So it’s a little bit less of something that’s scary. Okay. So if you’re not sure whether you need to collect sales tax or how to set it up, you can always message me. Maybe we can talk it through. We can walk through it, of course, for free. I want to just make sure that you’re set up properly and that you’re tracking it if you need to be. But if you’re not, then great.

Otherwise, if you found this episode helpful, please like it, comment, leave a review, share it on social media. And if you want to hear more topics like this or you’re looking for a specific topic, please fill out the form in the description box below. Otherwise, as always, I wish you the best week ever and we’ll see you next week. Farewell, fellow travelers.