Calculating and collecting sales tax is one of the most difficult parts of running a small business. The U.S. has no federal sales tax that applies to all the states. Each state has its own sales tax rules, paying deadlines and exemptions. This can make sales tax very confusing, especially to businesses that sell in more than one state.
What are Sales Taxes?
Sales tax is charged at the point of sale by the state government from the purchaser of the good or service. Small business owners are required to assess and charge sales taxes on behalf of the government and transfer it to them after collection.
Exempted Goods and Services
The state government determines which goods and services are exempt from service tax. However, usually, sales tax is not charged on the following:
- Raw materials
- Wholesale items
- Resold goods
- Non-profit goods and services
- Products supporting important industries such as agriculture, research, etc.
- Sales to charities, religious, and educational organizations
Also, states may not charge sales tax on certain essential goods such as basic food items and medicine. Many states also exempt occasional sales such as garage sales from sales tax.
Reporting and Paying
Sales taxes are generally reported quarterly or monthly. To report and transfer the collected taxes to the state government, a tax return is filed. Depending upon the location of your business, the rules for reporting may change. Therefore, check your area’s payment and reporting process. Remember that in some states, business owners may need to obtain a sales tax permit to charge and collect sales taxes.
Brick and Mortar vs Online Businesses
A business must have a physical presence known as a “nexus” to collect sales tax. It should have:
- A physical presence (a store, office or facility) in the state
- Property in the state is owned or leased for operating the business
- Business is conducted routinely and not occasionally on the business premises
There is no single sales tax law concerning online businesses. The Supreme Court makes it mandatory for online retailers to charge sales tax in the state in which it has a “nexus”. Certain states, however, require customers to pay sales tax to the state in which they reside. Two bills are under consideration and might become a law, clearing the present confusion over online sales tax.
Even though determining sales tax can be tricky, the states are typically unforgiving. In case of erroneous or late payments, a heavy penalty is charged with the possibility of criminal charges being pressed.