How do sales taxes work, and what are they? How do they affect businesses, and how do they differ? It pays to know the basics of sales taxes.
What is a Sales Tax?
According to the Small Business Administration a sales tax is imposed by state and local governments as a retail point-of-purchase tax. The purchaser pays for services and goods. Small business owners must assess the tax, collect it, and distribute to the appropriate governmental authorities within the prescribed time. Tax rates vary from state to state, which is confusing for businesses with customers in more than one state. Currently, only Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not impose a general statewide sales tax. There are a number of local municipalities, however, in Alaska with local sales taxes.
Know Whether Your Business is Required to Pay Sales Tax or Not
The first question is whether you must pay tax in your state. You may already know if your state requires tax payments, you must pay taxes, but that is not the only thing to consider. In many states, you must pay taxes, even if your employees occasionally visit a state, or if you store products locally in a warehouse. Having a sales tax presence in a state is a Nexus. Even if you have a truck that delivers products in a business in a state, you might owe taxes, so the only way to know is to contact your local state taxing agency, which could have a name such as Department of Taxation, Division of Revenue, or Office of the Chief Financial Officer. You could probably find a link to it through your state governmental website, which sometimes is the name of your state followed by .gov. Even if you don’t owe a state tax, you may owe a local tax, so you might want to contact city officials.
How is Money Collected as Sales Tax Processed?
Usually, states must pay the taxes they have collected quarterly or monthly. They must use a special tax return for sales taxes. All taxable sales must be reported, along with all sales, exempt sales and the amount of tax due. There are penalties if they are not paid on time.
Are Any Types Transactions Exempt from Sales Tax?
Yes, but this can vary from state to state, and you should check with your state government as to which goods and services sold in your state are subject to sales tax (this varies a great deal). Usually the following types of transactions are exempt:
- Resold items – Businesses often don’t have to pay sales tax on wholesale purchases. That is because the end consumer will it.
- Raw materials – If raw materials are made and sold for other goods, these are usually considered sales tax exempt.
- Non–profits – Sales made to non-profits are also exempt.
Does Your Business Sell in Different States?
Whether you owe taxes under this circumstance is sometimes gray. Suppose your customers are in other states, as often happens for e-commerce and online business owners? Which state rules do you follow? Do you need to charge sales tax?
Here are guidelines:
- If your business has a nexus in a state, an office, warehouse, employees, or other criteria your state has established, then you must collect sales tax.
- If you don’t have a nexus, that you are not required to collect the taxes.
What defines nexus can vary from state to state.
Register for a Sales Tax License
Before you collect sales tax, you need a sales tax license, and your state taxing agency can help with that. States make it simple and inexpensive to register for a sales tax license, because the money they receive is a big revenue source. As soon licensed, you must begin to file sales tax returns as soon regularly.
For more information, feel free to contact us.