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Sales Taxes: The Ultimate Guide for Small Businesses

Sales Tax

Collecting taxes and remitting it to the state regularly, this is one aspect of maintaining a small business that you just cannot ignore. If you’re dealing in the sale or leasing of tangible personal property or taxable services, you must be responsible for collecting sales tax from your consumers. And what do you need to do that? A seller’s permit.

The seller’s permit allows you, as a business entity, to charge sales tax from your customers at the point of sales. With this permit comes another permit- the resale certificate. Sometimes as a separate license and sometimes included in a seller’s permit, this one allows you to buy a product for the purpose of resale or renting without paying the sales tax.

Your customers, too, can be exempt from paying sales tax to you, as long as they have a resale certificate to validate the purpose of their purchase.

Before this gets any more confusing, let’s break down everything you need to know about sales tax.

Does Your Business Collect Sales Tax?

If your business deals in the sale of taxable goods and personal property, taxable services and any other peculiar category as mentioned in your state’s provision, then yes.

Your business must collect sales tax from the consumers at the time of the sale.

This does not mean that you get to keep the tax collected. This amount being collected has to be remitted to the state’s authorized authority on a regular basis. This could mean a half yearly remittance, quarterly, or monthly, depending on the number of sales you make.

This also means that as a business, you must, under every circumstance, have a detailed and error free record of all sales and transactions made during a particular period.

How Does a Business Collect and Remit Sales Tax?

For your business to collect sales tax from the costumes, you must apply for a seller’s permit. This permit allows you to legally conduct business in the state while collecting sales tax on every taxable item or service.

If you’re establishing a new business, get in touch with your local or state authorities and find whether your line of business is obligated for collecting the tax. In most states, if you’re dealing in tangible goods, you must collect the tax. Multiple states also levy taxes on services of architects, attorneys and consultants.

There are, however, five states that do not levy a state sales tax. These include the following: Alaska, Delaware, New Hampshire, Montana and Oregon. Alaska and Montana, however, allow local municipalities to collect sales tax.

Except for these, all 45 states and the District of Columbia levy a state sales tax in varying degrees. The cumulative tax includes both state and local sales tax and may vary between states and even districts.

When it comes to a new business, you must:

  • Register with the state if you’re indulging in the sale of taxable goods and services and apply for a seller’s permit.
  • Also apply for a seller’s permit in other states where you might decide to conduct sales and have a physical presence.
  • Learn about the appropriate tax percentage to be levied at the time of sales.
  • Ensure that you maintain the proper records or have a professional do it for you. These records are essential in the light of an audit.

How Online Sales are Taxed?

As per the previous nexus, a business entity must apply for a seller’s permit if they have a physical presence in the state. It is crucial to remember that sales tax is state specific, you might be obligated to apply for multiple states if you’re selling products or services there and have a physical presence.

This means that previously, businesses were not required to collect sales tax on out of state online sales. It was the purchasers that were responsible for paying the use tax. The consumer compliance has been at an all time low leading to the changes in the law. It was on the same grounds that the Supreme Court resolved the issue of South Dakota v. Wayfair Inc. As per the new law, out-of-state sellers must also collect and remit sales tax.

However, there are still limitations and specifications to keep in mind.

The Act does not state that every out-of-state transaction is taxable. For a business to start collecting sales tax in a state with a seller’s permit, their total sales and revenue should be more than the threshold of delivering more than $100,000 as goods or services or engaging in at least 200 separate transactions in the particular state, annually.

When selling through a third party seller or a marketplace facilitator, verify whether the website is responsible to collect and remit sales tax for you. These websites might still require you to have a seller’s permit.

In Which Case Do You Not Collect Sales Tax From Consumers?

Here are some exceptions that do not require the collection of sales tax:

  • You conduct your business in the previously stated states.

The five states do not impose any state sales tax that must be paid by the consumers at the point of sale and remitted to the state. However, as previously stated, Alaska and Montana allow local municipalities to levy sales tax. Learn more about state and local sales taxes here.

  • While these 5 states do not levy any sales tax, there are multiple other states that have a marginally smaller tax for food and clothing.  While they do not exempt you from collecting taxes, they do provide some benefits to the consumers.

The seven states of Arkansas, Illinois, Missouri, Tennessee, Utah, Virginia and West Virginia have adopted reduced sales tax on food and groceries.

Hawaii, Idaho, Kansas, Oklahoma and South Dakota, on the other hand, provide tax credits and rebates.

  • Your customer has a resale certificate.

A resale certificate, often issued along with a seller’s permit, is beneficial when a product is bought for the purpose of resale or renting. This permit exempts your customer from paying the sales tax to you during the point of sale.

The customer is then obligated to resell or rent the product bought and collect sales tax from their customer.

Are You Obligated to Pay Sales Tax When Buying From Another Business?

Just like previously stated, if your customer plans on reselling an item or leasing it, they aren’t obligated to pay the sales tax. Similarly, if you’re buying a product for the purpose of reselling it, you do not have to pay the sales tax.

For instance, as a retailer, if you purchase a batch of personal hygiene items from a wholesaler, you don’t have to pay the sales tax on the purchase. Instead, you are obligated to collect the sales tax from your customers upon resale and remit it to the state authorities.

Conclusion

As a small business, the legalities of forming a business is hard enough, and the confusion regarding sales tax doesn’t help. Through this article, we’ve hoped to answer most of the questions asked as well as clarify some of the confusion surrounding sales tax.

To make the process easier, you can find other articles and information on the website that can quench your curiosity. You can also register online and get your seller’s permit delivered to you without any hassle. Read on to learn more.

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