Navigating sales tax is tough for many business owners. It can be difficult to understand and to implement correctly. It is even more challenging for businesses in e-commerce because of the complications related to what items are and are not taxable, which department is actually collecting the tax, or if tax should even be collected at all.
This article will focus on sales tax within three areas:
Let’s begin by defining sales tax and discussing how it is collected.
Sales Tax Definition
Sales tax is a charge that is paid by the buyer at the point-of-purchase in retail and then remitted to the local tax collection agency by the seller. There are several states that don’t charge sales tax, including Alaska, Montana, Delaware, Oregon and New Hampshire.
What is Sales Tax Made Up Of?
Sales tax is usually imposed by the state with local and county governments occasionally supplementing the tax amount with local add-on taxes. For instance, Intuit’s company headquarters are located in Mountain View, California. That city is in Santa Clara County. The local tax rate is 8.75% and is broken down like this:
The city of Mountain View doesn’t have an additional tax, so the total tax rate for Intuit is 8.75%, which is paid on all retail transactions in the city of Mountain View, CA.
How is Sales Tax Collected?
Sales tax is paid when business owners include the tax on all retail purchases. They then collect that tax and pass it onto the correct department within the appropriate timeframe. Taxes usually need to be paid quarterly or monthly. Many states also require businesses to have a sales tax permit to be able to collect sales tax. You can view a breakdown of sales tax permit requirements for each state from the Small Business Administration here.
Sales Tax for Stick Built Businesses
Navigating sales tax for retail stores is generally pretty easy because all retail sales require a payment of sales tax. That means that if your company sells lamps, you are required to charge your customer sales tax for every lamp they purchase. And you as the owner are responsible for keeping track of the tax you collect and then reporting that amount to the government agency.
Of course there are exceptions. If the buyer intends to resell the item they are not required to pay sales tax. A general rule is that sales tax can only be collected on a final retail sale, not on a wholesale purchase.
For example, if you sell a pallet of lamps to a furniture store, that furniture store isn’t required to pay sales tax on that purchase. However, their customers will be required to pay sales tax on any lamp purchase.
Location and Nexus
Stick built business owners also need to understand exactly where you are responsible for paying sales tax. A state government cannot demand that a business collect sales tax or register to do so unless your business has a physical presence in that state. This exception is known as “nexus,” and the definition is:
Basically, if you have some type of physical presence in the state in which you do business, the argument for nexus can be made, making you subject to that state’s sales tax laws.
Sales Tax for E-Commerce
Navigating the sales tax for online sales is one of the most challenging parts of small business. The key thing to remember is this: you must pay sales tax for the state in which you are located.
For instance, if you have an online store with office space in New York, you will be required to charge New York sales tax on all sales to buyers located in New York. But any sales to people outside of New York will not be subject to any sales tax.
This is a huge loophole to the state tax law, especially considering that e-commerce is a big business. As a result of this tax loophole many states have implemented a complementary “use” tax law that makes it a requirement for buyers to pay an equivalent state tax on any purchase made through a catalog or online. This “use” tax can be levied against business and individual customers that buy goods and services online.
Exceptions to Sales Tax
There are exceptions to the payment of sales tax. These are the most common:
Some states realize that some products have to be purchased in order for people to survive. These are items such as prescriptions, clothing and food. The level of exemption varies from state to state, with some not charging any tax and others assessing a lower tax rate.
Federal law stipulates that states can’t charge sales tax on purchases made to the federal government or any of its agencies. This is also true in many states for the state and its agencies, and for counties, cities and other local jurisdictions within the state. Other tax-exempt buyers include religious, educational organizations and non-profits.
Some states also make an exception for activities it believes to contribute to the good of the public, such as pollution control or industrial development.
For instance, many states where farming is a large industry make all sales of equipment and products used for farming tax-exempt. This also tends to be true for equipment, machinery and raw materials used in manufacturing work.
Most states also exempt the payment of sales tax when something is considered to be an isolated, casual or occasional sale. A great example would be your annual neighborhood yard sale.
However, if that person begins to make regular retail sales the state may decide to deny further exemption.
If your business typically sells wholesale products to another business that turns around and sells that product, you will not be responsible for collecting sales tax. However, if your business sells services or products for use by other businesses, you will be required to collect sales tax.
Navigating sales tax is not always easy. It is your responsibility as the business owner to be aware of your tax responsibilities in order to avoid penalties for failure to pay sales tax. You can use the information in this article as a guide and check with your accountant for additional instructions.