As a consumer, you are probably well aware of the concept of sales tax. In most states, sales tax is the reason that a $100 item actually costs you closer to $105 at the register. But once you’ve gotten your company up and running, you’ll likely need to address the idea of sales tax from a new perspective.
Many people assume that only large companies or huge retail outlets need to be concerned with sales taxes. That’s simply not the case. Read ahead for the most important aspects of collecting and paying sales taxes.
What is sales tax?
While there is general uniformity between the states when it comes to the collection and payment of sales taxes, there are some substantial differences between the states’ process of collection. In some states, a majority of sales taxes are taken directly from customers during transactions. In others, your business will be liable for most of the amount collected. However, in a majority of states, the burden will be split between you and your customers.
Despite the differences from state to state, these four steps will generally help you define your sales tax collection process:
- Identify taxable transactions
Nearly any retail sale of a product can be applicable to the collection of a sales tax. Originally, the laws only allowed for the transfer of goods to be taxed, but recent laws have changed in some places to make concessions for leases and some services as well. It is very important to remember that services, as well as goods, are subject to sales tax.
- Define and understand exemptions
Many states have sets of special exemptions that allow certain types of transactions to be free from sales taxes. Some of these include when items are purchased explicitly for resale, or when sold to nonprofits. These exemptions can vary wildly from state to state, so be sure to pay close attention to all of your local sales tax regulations.
- Learn how to calculate tax
Sales tax collections are almost always calculated as a percentage of the total amount of the transaction in question. To calculate the tax, you must multiply the total amount by the percentage of the tax and then add that amount to the total. Let’s say that the sales tax rate is 5%, and the total cost for the good or service your business is selling is $500. You would multiply the total ($500) by the percent of sales tax (.05 = 5%) for a tax of $25. Add the tax to the total, and you end up with a total transaction of $525.
- Understand the difference between “sales” and “use” taxes
With the emergence of the Internet and online ordering, it has become difficult for states to collect sales taxes on many online orders. In order to counteract this, many states have broadened their state use tax to include the storage and use of property to help complement the traditional sales tax.
The proper collection and payment of any and all taxes is one of the most important compliance requirements that your business will face—sales taxes included. With this in mind, be sure to pay attention to these collection details:
Some states require each of your retail locations to be officially registered to collect sales taxes from customers. Be sure to verify whether or not this is required in your state, and apply for any permits if necessary.
- Collecting the tax
Whether or not your state requires you to collect sales taxes from your clients, or pay them yourself, you will be held liable for the full amount due. Carefully collect and track all sales tax related funds, and pay attention to make sure that you aren’t collecting taxes on exempt transactions as well.
- File and pay on time
After collecting all of your required sales taxes, be very sure to make sure to file the appropriate returns and send any necessary payments on time. Noncompliance can have serious consequences.
If in doubt, get help
No matter how comfortable you are with business tax law, questions will likely come up from time to time. As opposed to making educated guesses regarding tax payments or liabilities, it is typically well worth the effort and expense to consult with a licensed accountant to address these questions.