For many small businesses, sales tax is part of the reality of doing business. Depending on the state, you may be required to make a monthly or quarterly payment of your sales tax. Yet, there are some transactions that do not qualify to be charged sales tax, thus reducing the amount that your business owes the state. Therefore, it is important to know which transactions qualify for sales tax, so that you are able to accurately collect sales tax at the time of the sale. Here is some of the transactions that you need to be aware of.
Tangible Personal Property
The original of sales tax was targeting retail sales of tangible personal property. Over time, some states have begun to include specific services as part of their sales tax laws. Keep in mind, each state defines retail sale differently, but usually have a relatively broad definition. The method of payment has no effect on whether the sale is subject to a sales tax. For example, if you have layaway sales or conditional sales, these are still subject to sales tax. If property changes hands, it is likely to be subject to sales tax.
Tangible Personal Property is generally defined as any movable item that has substance and value. If it can be seen, weighed, measured, felt or handled in any way, then the property in question would generally fall in the tangible personal property category. However, stocks and bonds would not. States have broad leeway, however, in adding intangible property to the list of transactions eligible for sales tax.
Ultimate Consumer Sales
When you are making a retail sale, in theory, the only transactions that will be consider retail transactions are the ones that are made to the final consumer. This rule leads to two principal exemptions to sales tax, regardless of the particular state.
Resale Exemption – This type of exemption comes into play for wholesale purchases. If your business is not the end user, but you are purchasing products to fill your inventory, then those are most likely not going to be subject to tax. The property purchased can be resold as is, or it can be altered, but typically it will not be subject to sales tax.
Manufacturing Exemption – Does your business manufacture something that requires basic raw materials? Then those materials are not likely to be subject to sales tax. However, these raw ingredients or materials must become an ingredient or component of property that will end up being manufactured, processed, assembled or even refined for use at a later time.
Understand that depending on how your business ends up using the materials or inventory will have an impact on whether or not your business will have to pay sales tax. Also, while you might not have to pay sales tax for your goods or materials, that does not mean you will not have to collect it.
Are Your Services Subject to Sales Tax?
While most businesses with a store front and inventory are likely to have the responsibility to collect and turn over sales taxes to the states that they do business in, if your business provides services, then it might not be so simple.
The reason is that many states have created a piecemeal structure regarding what services they will require to collect sales taxes and which ones they will not. Why have intangible services come under the sales tax laws? Simply put, states with budget crunch issues have found that expanding their sales tax scope can result in increased revenue.
Therefore, depending on the state you do business, your services may be subject to sales tax. As a result, it is important to do your homework so that you can collect the sales tax as each transaction is completed. The reason that this is important is because compliance responsibilities fall upon the seller. If your business is going to be making sales that fall under the sales tax laws, then you will need to be prepared to comply with your state’s registration procedure and compute the tax, as well as collecting and paying the tax to your specific state.
As you can see, determining the different transactions that would fall under the sales tax laws of your state are dependent on what type of business you run, if you are only handling wholesale transactions and if you are making purchases of wholesale goods. Therefore, consult with your accountant or bookkeeper to determine if your transactions fall under your state’s sales tax laws or if they would be considered exempt.
ERNIE BUSTAMANTE