As you know from everyday shopping experiences, you can't always buy something priced at $500 by paying $500. You're likely to pay anywhere from $520 to $550, with added state and local sales taxes. But what exactly is a "sales" tax? And how does being a small business owner potentially affect the way you deal with them?
What are sales taxes?
Across states there are many types of sales tax systems; the key difference is whether the seller or the purchaser is the main taxpayer. In some states, the tax is imposed on sellers, who can pass it along to purchasers. In other states, tax is imposed on the purchaser, with the seller being responsible for collecting and sending it to the state. In other states, tax liability is shared by sellers and purchasers.
- Defining a taxable event. Any retail sale can trigger a tax. Initially, states limited taxes to retail sales of tangible personal property. Recently, the scope has expanded to include leasing transactions and some services.
- Recognizing common exceptions. Each retail sale is considered taxable unless an exemption applies and the purchaser establishes the right to exemption.
- Computing the tax. Taxes are computed on some measure of gross receipts—they apply to the full amount a seller receives from a purchaser, rather than the net profit.
- Understanding use taxes. State sales tax only applies to retail sales that are made within the state. They create a loophole: purchasers can avoid the tax by purchasing in other states. That’s why each state with a sales tax also has a complementary "use" tax that for the storage or other use of personal property or taxable services in the state. So if you buy a product online or from a catalog without sales tax, you still need to pay your state the equivalent use tax.
What small business owners should know
When you're running your own business, tax obligations are often on your mind. Whether you handle your own taxes or rely on a professional, you and your business are the ones on the line. Keeping up on your federal obligations is a top priority, but don't forget about your state tax obligations—complying with them is crucial. Be prepared to handle:
- Registration. Secure sales permits for all your business locations where you'll be making taxable sales.
- Collections. Because you usually collect sales taxes from customers, plan on accounting for your sales taxes with your very first taxable sale. Likewise, know when you don’t have to collect because customers have made valid claims for exemptions.
- Payments and returns. Once you've collected the taxes, remit them with the appropriate returns to the appropriate tax agencies.
- Professional knowledge and guidance. Rely on a good accountant or other tax professional, and gain a working knowledge of your state tax obligations to get the most out of your relationship.