For many people taxes are the scariest part of starting a new business. No one wants the department of revenue knocking on their door claiming they own back taxes. Taxes are a complicated business, so please contact your own state's department of revenue to find out the applicable laws for your business.
Do I have to collect sales tax?
This one depends on what type of business you're in and where you are located. It also depends heavily on who your customers are. In very general terms, anytime you are selling a product (some states also tax services) to a person who is located in your state for their personal use, you must collect sales tax. If you are selling from a retail store, you don't need to worry about the buyer's location - you will tax everything at your state/county/city's tax rate. If you are selling items online, you are currently only required to tax items that are shipped within your own state. With online purchases, the buyer is responsible for reporting the sales tax on their personal tax return.
What determines my location?
Your nexus, or sufficient physical presence, is determined by the presence of people (employees, service people, or independent contractors) or property (inventory, offices or warehouses). Physical presence can be permanent (like a retail store location) or temporary (like a trade show). Consigned inventory locations and inventory warehousing locations also count towards your nexus.
Do all states require sales tax?
No. There are currently 5 states that don't impose a state sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. Although a couple of these states do allow taxation by local jurisdictions.
What is the difference between sales and use tax?
Sales tax is a tax that you collect when selling something to your customer. You are collecting it on behalf of the buyer and remitting it to the state. Use tax is tax due on something that you have purchased but not been taxed on, a perfect example is when you buy something online or from an out-of-state vendor and they do not collect sales tax, you are responsible for reporting these purchases and paying the taxes in your state.
A buyer claims they are exempt from paying sales tax - is this true?
If a person is purchasing for resale (meaning they will sell this item again) and they have a resale certificate, they do not have to pay sales tax. To protect yourself in case of audit, you should always obtain a copy of the resale certificate and keep it on file. In addition, you will want to make sure your accounting or POS software can track purchases by customer name, so you can link the tax free sale to a specific person or company. A reseller cannot use their certificate to purchase things that they will consume. It only applies to items they are purchasing with the intent of reselling.
Do non-profits have to pay sales tax?
Yes. Often times non-profits will claim exemption from sales tax. They are not exempt on the front side of the transaction, meaning when they are buying from you. On the back end, they can file for a refund of sales tax paid on their annual tax returns.
How often do I have to file my sales tax return?
This varies and your period will be determined by your state. However, monthly filing is the most common.
Do I have to file a return even if I don't owe taxes?
If you have registered with the state to collect sales tax, then the answer is yes. You must file a return every period, even if the tax liability is zero.
What if I don't have the money to pay my taxes?
The money you collect for sales tax is not your money. It is a liability, in this case money that is collected on behalf of the buyer. You can expect serious repercussions if you do not pay your sales tax in a timely manner.
Keep in mind - I have only covered the basics here. With taxes it is always best to be proactive instead of reactive. If you have nexus and tax-ability, then you are liable for sales tax from day 1 of opening your business, regardless of whether you collected the tax money from your customer.
Please seek help from your local department of revenue or your tax accountant if you have questions regarding your specific situation. I would also like to mention that tax laws change frequently, so this post may become outdated at some point in the future.
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