If you are a small business owner, tracking the taxes owed to the various levels of local, state and federal government are par for the course. This includes sales tax obligations. Yet from state to state, there are multiple regulations that can make this an intricate process. What can often make the difference is determining who is going to be paying the sales tax, the seller or the purchaser. While the tax may at times be imposed on the sellers, they can often pass it on to their consumers. Yet in other states, the tax is meant to be paid by the purchaser, making the seller responsible for collecting it and then paying that tax to the state. However, there is one other scenario, which is one that has the tax liability shared by both parties. Here are a few key points to keep in mind:
Defining a taxable event – Any retail sales may be able to trigger the sales tax. At the beginning of these types of laws, states limited these taxes to just retail sales of tangible personal property. However, the scope has expanded to include leasing transactions and a variety of services. Keep in mind, this varies from state to state.
Computing the tax – Taxes are generally computed based on some measure of gross receipts. Essentially, they apply to the full amount a seller receives from a purchaser, rather than the net profit.
Recognizing common exceptions – Depending on the state, there may be exceptions that could apply. However, most states require that you establish that the purchaser has the right to the exemption. This could be true for those organizations that are non-profit or for government agencies. However, you will need to be sure that they are eligible for the exemption based on their particular certification, which is based on the state.
Understanding use taxes – This is one of the parts of sales tax that can be confusing. Most state sales taxes only apply to retail sales that are made within that particular state. Therefore, a loophole gets created, as a purchaser can avoid the in-state sales tax by making their purchases out of state. The use tax is meant to close that loophole by creating a complimentary use tax for the storage or other use of personal property or taxable services within the state. Therefore, if you are buying your products online without a sales tax, you will still end up needing to pay the equivalent use tax to your state.
The Need to Know for Small Businesses
While most small businesses are focused on the taxes that they might owe to the federal government, the reality is that state sales tax also comes with its own set of penalties. If left unpaid, there can even be collection actions initiated against your business. Therefore, it is important to make sure that you are taking care of all your reporting and collection obligations as outlined by your specific state. Here are some of the points to keep in mind.
Registration – Make sure that you have secured your sales permits for all your locations where taxable sales will be taking place.
Collections – If you are the one collecting sales taxes from your customers, plan with your bookkeeper or accountant for your books to reflect that sales tax from your very first taxable sale. It is also important to know when you do not have to collect sales tax, and make sure that your point of sale software can be programmed accordingly with your state’s sales tax rate and the various exemptions to their sales tax law.
Professional knowledge or guidance – Let’s be realistic. If your business is crossing state lines, then you will be collecting sales tax in multiple areas. Therefore, you will need professional assistance to make sure that you are meeting all the necessary filing deadlines and making your payments on a prompt and timely basis. So make sure that you are using an accounting professional that can help you to track those items and make those payments promptly to the appropriate tax agencies.
As you have seen, a small business needs to make sure they understand the sales tax laws, including potential exemptions. Doing so will help your business to stay in compliance with the state and avoid any potential penalties or fines that could result from making late payments. Also, make sure that you are meeting all the obligations laid out by your state on an annual basis.
James Wells EA MBA Tax Office