Delaware is a haven for both shoppers and business owners, thanks to its unique tax-friendly policies.
With no state or local sales tax in Delaware, residents and visitors can enjoy tax-free shopping on a wide range of items, from clothing to electronics.
This also makes the First State an attractive destination for businesses looking to maximize profits and consumers eager to save money.
This guide breaks down everything you need to know about Delaware, one of the five states that do not have a sales tax. By the end of this comprehensive guide, you’ll understand Delaware’s unique sales tax regulations with confidence and ease.
Is There Sales Tax in Delaware?
No, Delaware does not impose a statewide sales tax. It’s one of five U.S. states without a general sales tax, making it an attractive location for consumers and businesses.
Historically, Delaware’s tax-free status has been in place for decades, supporting the state’s goal of remaining business-friendly. This has turned Delaware into a popular destination for tax-free shopping, helping to reduce overhead for local retailers.
Beyond Delaware Sales Tax: Other Taxes You Should Know
While Delaware skips sales tax, that doesn’t mean it’s tax-free. One of the most important taxes for businesses in Delaware is the Gross Receipts Tax (GRT).
Unlike sales tax, which is collected from customers, the gross receipts tax is a tax on the business’s total revenue. Rates vary depending on your industry and range from 0.0945% to 1.9914%.
Aside from gross receipts tax, Delaware also imposes the following tax types:
Corporate Income Tax
Delaware imposes an 8.7% corporate income tax on federal taxable income that is apportioned to the state. As of January 1, 2020, the apportionment is based solely on sales within Delaware.
All domestic and foreign corporations must file an annual return (Form CIT-TAX), regardless of income, and cannot file consolidated returns.
There is no minimum corporate income tax, but net operating losses can be carried back up to $30,000 for two years or carried forward for 20 years.
Franchise Tax
Corporations incorporated in Delaware, regardless of where they operate, must still file an Annual Franchise Tax Report and pay Franchise Tax for the privilege of incorporating in the state.
This requirement applies even if the corporation doesn’t do business in Delaware.
The minimum tax is $175 for corporations using the Authorized Shares method and $400 for those using the Assumed Par Value Capital Method.
Most corporations face a maximum tax of $200,000, unless classified as Large Corporate Filers, who are subject to a $250,000 tax.
Corporations owing $5,000 or more must pay estimated taxes in quarterly installments:
- 40% by June 1
- 20% by September 1
- 20% by December 1, and
- remaining 20% by March 1
In case of failure to file on time, you will incur a $200 penalty plus 1.5% monthly interest on unpaid balances.
Other entities, such as Limited Partnerships, Limited Liability Companies (LLCs), and General Partnerships formed in Delaware, do not file annual reports but are required to pay a $300 annual tax, due by June 1.
Late payments incur a $200 penalty and accrue interest at a rate of 1.5% per month.
The Franchise Tax and Annual Report are due by March 1 each year, and filings must be done electronically through the Delaware Division of Corporations. Exempt domestic corporations do not pay tax but are still required to submit an Annual Report.
Withholding Tax
If you run a business in Delaware and have employees, whether they live in the state or not, you’re generally required to withhold Delaware income tax from their wages. This applies as long as those wages are also subject to federal income tax withholding.
To do this, you’ll need to register with the Delaware Division of Revenue as a withholding agent and regularly send the withheld taxes to the state.
Delaware and Remote Sellers
Delaware does not have economic nexus laws for sales tax, which means remote sellers are not required to collect or remit sales tax in the state.
However, Delaware-based businesses selling to customers in other states can still trigger a physical nexus, which may require them to register, collect, and remit sales tax according to each state’s specific rules.
Income Tax Nexus
Delaware’s income tax nexus standard is based on whether a business’s income-producing activities are connected to the state, rather than solely on physical, economic, or factor presence.
Instead, Delaware determines tax nexus on a case-by-case basis using a nexus questionnaire submitted by taxpayers.
Nexus-creating activities include:
- Owning or leasing property
- Using local banking services
- Shipping goods
- Extending credit
- Performing installations or repairs
- Employing agents
- Advertising, soliciting sales, handling inventory, and
- Conducting credit checks in Delaware.
To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.
Business Compliance Obligations in Delaware
Operating a business in Delaware involves several key compliance requirements.
All business entities in Delaware must obtain a State of Delaware Business License from the Delaware Division of Revenue. Also, this license is typically $75 for the first location and must be renewed annually.
Separate licenses are required for each business activity. Businesses can apply for or renew licenses through Delaware’s One Stop Business Licensing and Registration Service.
Conclusion
Delaware doesn’t require businesses to collect state sales tax, but you still need to follow other tax rules and policies for compliance.
From the gross receipts tax to potential sales tax obligations in other states, it’s essential to stay informed about these matters.
To ensure your business stays tax compliant even in a no-sales-tax state, you can make things easier by consulting tax professionals like TaxHero.
Schedule a call with our CEO, who will personally walk you through the intricacies of sales tax compliance in every state.
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