If you're not residing in one of the five states exempt from sales taxes, you've probably encountered sales tax payments as a consumer. However, if you're a small business owner, understanding your sales tax obligations is crucial. This encompasses what items are taxable, how taxes are calculated, and the procedures for reporting and remitting sales tax.
The notion of implementing a national sales tax has been under discussion since the era of the Civil War. However, as of now, federal sales-style taxes are generally limited to specific items like motor fuel and tires. Most sales taxes are administered by state and local governments. (For international business, consult our article on VAT vs. sales tax.)
Unless you're exclusively operating within one of the five states without general sales tax, you're familiar with state and local sales taxes. You understand that a $5.00 purchase will amount to more than $5 due to added sales tax.
Nevertheless, what's your depth of knowledge about these taxes beyond the basic awareness of their inclusion in purchase bills? For small business owners, the more relevant question is: what should you genuinely grasp about sales tax regulations?
To ensure you're not overpaying sales taxes or caught off guard by a surprise audit from a tax assessor, familiarize yourself with the following aspects:
Nature of Sales Taxes and Distinctions from "Use" Taxes Identification of the Taxpayer for Sales Tax Purposes Categorization of Taxable Transactions Role of the Seller in Sales Tax Collection and Buyer Responsibilities Methods of Tax Calculation Reporting and remitting sales taxes to state authorities
Exploring Sales Taxes
Sales taxes are imposed by states on transactions occurring within their borders. Typically, these taxes apply when specific events are triggered. Most commonly, the completion of a retail sale initiates the tax. Initially limited to retail sales of tangible personal items, these taxes have expanded to encompass leases and certain services in recent times.
In general, retail sales are presumed taxable, but exemptions exist based on item type or purchaser characteristics. Business owners must know which items are taxed and at what rates. However, purchasers often need to establish their eligibility for exemptions. For instance, they might provide proof of being from a tax-exempt organization.
Sales tax systems in the US differ, primarily regarding whether sellers or purchasers bear the main tax liability. Some states impose taxes on sellers, who can pass them on to purchasers. In others, purchasers are directly taxed, and sellers collect and remit the tax. Yet, some states share tax liability between both parties.
Sales taxes usually depend on gross receipts, covering the entire amount received by a seller rather than just the net profit.
Varieties of Sales Tax Systems
When referring to "sales taxes," we're addressing state-imposed taxes on retail sales. The crucial distinction among states lies in whether taxes apply to sellers, purchasers, or transactions. This determination shapes:
- Tax liability
- Legal action possibilities
- Refund claims
Three common types of sales taxes are:
- Seller Privilege Taxes: Imposed on retailers for the privilege of selling within a state. Retailers can either pay this tax themselves or transfer it to purchasers.
- Consumer Excise Taxes: Applied to individuals making retail purchases. Sellers act as tax collectors, and the tax is primarily the purchaser's responsibility.
- Retail Transaction Taxes: Taxed on the retail transaction itself, with both sellers and purchasers sharing liability. Sellers collect and pay the tax, while purchasers ensure tax payment.
The majority of states adopt consumer sales taxes, where buyers bear the tax burden and sellers collect and remit. Fewer states utilize seller privilege taxes.
For purchasers, understanding the tax type is vital. Under vendor privilege taxes, never pay unbilled tax; for consumer excise or retail transaction taxes, unbilled tax can lead to personal liability. Unbilled tax for these types may necessitate direct payment to the state.
Exploring Use Taxes
A state's taxing power is limited to its jurisdiction. This means states can't tax retail sales consummated outside their borders. To counter this, states have complementary "use" taxes. These taxes apply when purchased items are brought into the state for use.
Use taxes mirror sales taxes in scope and exemptions. They are assessed on personal property usage within the state, equivalent to what sales tax would apply if the transaction happened in-state.
- Use taxes are self-assessed.
- Purchasers often get credit for sales tax paid in another state.
- Use taxes might apply even to in-state purchases of items used for business or personal purposes.
Understanding these tax nuances is essential for small business owners to navigate their obligations accurately.