For businesses that use Square, setting up the system to collect sales tax properly can be a huge obstacle – not because Square is complicated, but because sales tax is complicated. What seems like a straightforward task on paper, charging and collecting sales tax each time you make a taxable sale, can quickly become overwhelming in the real world where one sale is often not like another.
A business that sells liquids in refillable bottles, might charge for the sale of the liquid and the deposit on the bottle all in the same transaction. While the sale portion of the transaction is taxable, the deposit is not.
A jewelry designer might sell her jewelry in-store on weekdays, but travel to art fairs located all across her state on the weekends. Whether her state is destination-based or origin-based for sales tax purposes, the tax rates that she’ll charge on the road on the weekends for the same items will likely be different from the rate she’ll charge during the week.
Business owners who sell in-store and on the road have unique tax challenges.
In the real world of tax collection things get tricky. The good news is that once configured properly, Square can accommodate even the most complicated transactions. And once you’ve dealt with the tricky parts up front, Square will handle most of the work of collecting sales tax on a day-to-day basis automatically. Here’s a brief overview of everything you need to know to collect sales tax with Square as well as the most frequently asked questions we hear from business owners about using Square.
The three things you need to do to get started with sales tax in Square are:
- list the items you’re selling
- list the sales taxes you’re required to collect
- add the correct rates
To begin, go to your Square Dashboard and select "Items.”
From there, select "All Items > Create Items" and set up your item including name, price, category, description, and SKU if applicable. You can create variations to one item with different price points by tapping “Add New Price Point."
To create taxes that can be applied to individual items, go back to the Dashboard and select “Taxes.” From there, select “Create Tax” and set up your state and local sales tax as follows:
- One tax with one combined state and local rate (for in-store POS transactions that are all taxed at the same rate)
- Separate taxes with the correct state and local rate for different items that are taxed differently, such as mixed drinks vs. merchandise (for in-store POS transactions)
- Separate taxes with the correct local rates for each location where you make sales in your state (for transactions that will take place on the road or for online sales in a destination-based state)
- Separate taxes with the correct state and local rates for any other states that you have a tax relationship with (for online or on-the-road sales in those states)
Create separate taxes with the correct rate for each state in which you make taxable sales.
Frequently, selling at a trade or craft show in a state does establish a tax relationship (nexus) with that state and requires you to set up a sales tax for transactions that occur there. (We’ll cover more on nexus below.) The rate you enter for each type of sales tax that you create in your Dashboard should include all applicable state and municipal taxes. You can find more information about rates from our State Tax Guides or from the Revenue Department in your state and any states where you have nexus.
Once you’ve named and set the rate for the tax, be sure to toggle “Enable tax” on. You’ll also choose either “Add tax to item price” which shows the tax as a separate line item, or “Include tax in item price” which shows one combined price for the item which includes the tax.
Do keep in mind that Square’s fees are taken out of the total amount of each transaction including taxes.
Once you’ve created sales taxes that will apply to your sales, go back to “Items” on the Dashboard, click on an item, and select the tax rate that will apply to that item.
Once you’ve set up items and taxes, Square offers a great deal of flexibility. You can always either change or remove the tax rate before a sale or change or remove the tax rate at the time of sale.
Once you've created a tax go back to "Items" to apply it to specific items in your library.
How to Customize Your Settings
The taxes you set up in Square are fully customizable. You can set up your taxes to only apply to certain items as discussed above, and you can create special rules that will automatically add or remove tax depending on the type of sale.
For instance, if you are a bakery that sells coffee and individually wrapped items to go, those items may be taxed differently than those sold to eat on the premises. You can create a “to go” tax rule. A conditional tax rule can be set up ahead and applied to the items at the time of the sale to remove a tax.
Note that a tax rule in Square does just that: removes the tax. It’s also important to note that a tax rule cannot be applied to a cart total, but it can be applied to either all items in the cart or to individual items in the cart.
How to Set Up a Tax Rule
To use tax rules, you will need to have “Dining Options” set up, such as “to go” and “eat in.” Go to your Square Dashboard and select “Create a Tax Rule.” Name your rule, and then tap “Select Tax” to choose the tax you want to remove from the sale. Then select “Select Dining Options” to indicate the dining option that will trigger the rule. Finally, select “Assign Items” to choose the items to assign to the rule.
First set up your dining options, then you can create a tax rule to go with that option.
How to Customize by Location
You may need to apply different tax rates if you sell from different locations. For instance, if you are a food truck owner who travels to different municipalities throughout the week, you may need to collect different taxes on Mondays than you will on Wednesdays.
This is fairly simple to set up by creating different locations in your Dashboard. To do this, simply select “Locations” from the Dashboard, edit the information there, and save. Then from the “Items” section, you’ll be able to choose an item, assign it to a particular location, and adjust the tax information for that item.
Knowing When to Charge Tax and How Much
If you’re using Square POS to make sales in-store, you will charge all applicable sales tax rates on taxable products or services that you sell on site. Unless you are selling food, beverages, or lodging, you will likely apply one tax rate to all your taxable sales. That rate is determined by your address and includes the overall sales tax rate for your state, plus any applicable city, county, or local taxes that apply in your area. Once you create the sales tax and set the rate on your Dashboard, you will just need to ensure that it stays up to date and that you’re aware of any rate changes that apply to you.
If you make sales from several locations in the same state, the same information above applies, but you will need to know the applicable combined state and local rate for each of your selling locations. If you sell across state lines, either due to setting up at trade shows or selling online, it gets more complicated.
Two issues that arise if you sell across state lines, online, or in multiple states are:
- Destination-based states vs. origin-based states
Selling across state lines creates extra tax complications.
Nexus refers to the minimum conditions that, when met, constitute a business presence in a particular state. If you make sales to customers in a state in which you have nexus, either online or in person, you need to register and collect sales tax for that state. Some of the things that might trigger nexus, besides having a business location in that state, are selling at a trade show in that state, storing inventory in that state, and having employees, representatives, or affiliates who make sales for you in that state. Unfortunately, every state’s nexus laws are different, and what constitutes a tax presence for one state may not do so in another state. Consult our State Guides or contact the state’s Department of Revenue directly to determine if you need to register to collect taxes in a state in which you’re making sales.
Destination vs. Origin
If you make sales to multiple locations online within a state in which you do have nexus, you need to know if that state is a destination-based state or an origin-based state.
In an origin-based state, you will charge one rate to all customers in that state, and that rate is based on your business location. In a destination-based state, you will charge the rate that applies to the location where the customer is located. If you sell online in a destination-based state, you will need to set up rates in Square for each location with a different tax rate in your state to which you make sales. If you live in a state like Michigan, there are no additional local taxes, so you’re in luck.
Charge one rate to all customers in an origin-based state.
Does Square remit sales tax?
No, once you set up Square and collect sales tax on your sales, you’re still responsible for paying those taxes to any states where you’ve made taxable sales.
Does Square report sales tax?
No, Square does not offer this feature. Once you’ve collected sales tax using Square, you’re still responsible for filing your sales tax returns in any state where you’ve made taxable sales.
Will Square automatically reflect a tax rate increase in my area?
No, you will need to adjust the rate yourself, including changes to state, county, city, and other municipal taxes.
What do I do if sales tax is not being applied correctly in Square?
It’s critical to keep the Point of Sale app updated to ensure that it syncs correctly with any changes to the settings you’ve applied on your Dashboard. If you run into a problem, try updating the app.
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