For most startups, maintaining tax obligations is a headache. This guide examines the main steps and concepts you need to know about a sales tax.
What is sales tax?
Sales tax, also known as "sales and use tax," is a tax levied by states, counties, and municipalities on business transactions involving exchanging certain taxable goods or services. State and local governments require that businesses collect sales tax from customers and send tax payments to the appropriate government agencies.
Taxable goods and services
Not all products and services are taxed. Each state has its own rules and regulations, and rates may vary from municipality to municipality. However, there are general guidelines for determining which goods and services are taxable and which are not.
Goods
Personal, tangible property is generally subject to sales tax. Here are some examples of frequently taxed properties:
Books
Calculator
Furniture
Household appliances
Motor vehicles
Pots
Raw materials (wood, fabrics, etc.)
Rental Properties
Most states do not tax considered "products." Typical examples include food, medicine, clothing, and gasoline.
Services
There is no fast rule for determining which services are taxable in the fifty states. However, keep in mind that your business may have to collect sales tax if it offers any of the following services:
Business Services: Consulting, advertising, public relations, or human resources services provided by your business.
Personal Services: Beauty, pet care, dry cleaning, and tour guide services are provided by your business.
Physical services: installation, inspection, maintenance, or repair of your customers' goods.
Real estate services: lawn mowing, snow removal, or repair of utilities belonging to your clients.
Toll-free services generally include health care, educational services, and some professional services. Other types of services are exempt in each state.
Register for sales tax
When you sign up for sales tax, you're essentially signing up for a sales license. There is also something known as a Resale Certificate, which saves you money on resale purchases.
Obtain a seller's license
All businesses that provide taxable goods or services must obtain a vendor's license. States issue these licenses, sometimes called sales tax licenses or tax authority certificates, to control the source of tax revenue.
To apply for a sales license, go to the Sales Tax section of your state's Department of Revenue home page. You will need information about your business. So make sure you have access to your company's formation documentation. As well as the employer identification number (EIN).
Although most states offer this license for free, some states charge a nominal registration fee.
Save money with a resale certificate.
Businesses can employ the use of a Resale Certificate, also known as a Reseller's License, to avoid paying sales tax when purchasing resale products. Consider the following examples:
Example 1: John owns an electronics store. His business buys computers, smartphones, and software in bulk at wholesale prices for resale to customers in his store. With a resale certificate, John's business can avoid paying the additional cost of sales tax for these purchases.
Example 2: Jane owns a business that builds and sells custom furniture. When her business purchases cut lumber, fabrics, paper clips, and other raw materials used to construct its products, she uses a resale certificate to avoid paying sales tax on these items.
In this way, resale certificates prevent the goods from being taxed several times before they reach the consumer.
Note: Not all commercial purchases are exempt from sales tax. Below is a list of popular items that do not qualify for the resale exemption:
Assets that your business uses to conduct activities, such as office supplies, equipment, etc.
Goods purchased by you or your employees for personal use.
Goods your business rents for use and not re-leasing.
Products that your company offers for free or as gifts.
To obtain a resale certificate, go to the VAT section of the home page of your state's tax administration. Many states permit you to download the certificate online for free.
How to calculate your sales tax obligations
To avoid penalties and the risk of costly audits, it's important that business owners collect the correct sales tax rate from paying customers.
When calculating sales tax, there are three types of sales to consider:
In-state Sales
In-store sales
Out-of-state sales
Note: By making sure your business taxes are properly recorded, you can save thousands of dollars and avoid penalties and fines. Meet with an expert today to learn more about how your business can benefit from the tax, accounting, and payroll services.
In-store sales
For traditional entrepreneurs who sell goods or services locally, calculating sales tax is very simple: all sales are taxed at the same local rate. Here's an instance of what this scenario looks like:
John owns and operates a hardware store in Ohio. Because building materials and building materials are taxed in Ohio, John charges his customers 7.5% sales tax on all sales. This includes the Ohio sales tax rate of 5.75%, the Franklin County sales tax rate of 1.25%, and John's District local tax rate of 0.5%.
In-state Sale
To determine the correct tax rate that you will charge when shipping your goods to your state, you must first determine whether your state imposes sales tax based on the sale or origin sales destination.
Destination-based
In most states, when a customer in your company's home country purchases one of your products remotely, from a mail-order catalog, or your company's website, the sale is calculated based on local tax rates and municipal regulations applicable to the customer's address. This is called the destination sales tax.
Origin-Based
Twelve states still assess sales tax based on the seller's local and local tax rates. This is called origin-based sales tax:
John has a customer who orders an electric drill from his online store. Since Ohio is an origin-based tax state, John would charge a standard sales tax of 7.5% of the price of the drill.
Out-Of-State Sales
Most small businesses never have to worry about collecting sales tax out of state.
To determine if you will need to collect out-of-state sales tax, you must first determine if your business is related to your out-of-state business. Nexus is a legal term for the physical presence of a business in a state. Here are the most common types of links:
A physical location, such as an office, store, or warehouse
A temporary physical location, including exhibition stands and festivals.
Affiliate marketing
An employee who works remotely or is a travel sales representative
Direct shipment from a third-party supplier.
Whenever a customer outside of your state makes a remote purchase, you should only collect sales tax if your business has a physical presence in that state.
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Don Bell Law