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Question – Do I need a state tax ID if I have an EIN?
Our Answer – When starting a business there are lots of applications and numbers you may not be familiar with. Two numbers that are often mixed up are the state tax ID number and EIN. As a new business owner, you’ll want to know what these different numbers are and what they are used for. Here we will explain the difference between the state tax ID and EIN.
What is a State Tax ID Number?
Most businesses selling goods and certain services or will hire employees will need to get a state tax identification number. In some states, every business will need to apply for one. Check out guide for starting a business in your state to see if a state tax ID number is required for your business.
State tax ID numbers are issued by the Department of Revenue or similarly named agency in the state where the business is located.
The purpose of a state tax ID number is for reporting taxes at the state level and are usually associated with sales taxes or income tax withholding for employees. This number also allows a retailer to enroll or obtain a Resale Certificate, Sales Tax Permit or Seller’s Permit (all refer to the same thing) which allows for tax-exempt status. Tax exemption allows a business to purchase goods that will be resold at retail. When those goods are sold to the eventual customer, the retailer collects the sales tax.
If the business has nexus in other states, which basically means having a physical presence, that business may need to also obtain state tax numbers in other states. Nexus can come from having employees working in other states or products shipping from warehouses in other states. This can include drop shipped products too but is dependent on the state and vendor.
What is an EIN?
An Employer Identification Number (EIN), also known as a Federal Employer Identification Number or FEIN, is a unique nine-digit number issued by the IRS (Internal Revenue Service). An EIN is similar to a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) that identifies certain businesses.
Any small business that pays employees or is a partnership or corporation is required to obtain an EIN. LLCs that elect to be taxed as a partnership or corporation is also required to get an EIN. EINs can be obtained from the IRS at no cost from the IRS website. Also, here is more information about applying for an EIN.
Not all business entities need an EIN. A sole proprietor or single-member LLC with no employees can obtain an EIN but are not required to do so. Instead, they can just use the owner’s Social Security Number. In this instance, the EIN is more for tax purposes and won’t mean much until preparing year-end income tax returns.
Companies will use the EIN when filing income tax withholdings and employment tax returns. Banks will often require a new business to have an EIN before opening a business bank account. In addition, the EIN is used when applying for loans or credit cards, applying for business licenses and to accept credit cards.
Depending on the state your business is in, business entity, what you are selling and if you have employees you may need one, both or none of these numbers. Check out our guide for starting a business for the requirement for each state.