Small Business Tax Tips

Collecting Sales Tax

Collecting sales tax isn't an optional task for small business owners. Make sure you collect sales tax and report it accurately and on time.

The responsibility of collecting and reporting sales tax is an annoying, yet necessary part of running a small business.

Collecting Sales Tax

But keeping sales tax straight is easier said than done. Exemptions, requirements, and gray areas abound, and if you don't know what you're doing, you could quickly find yourself in hot water with your dear old Uncle Sam.

Although there is no direct benefit to you or your business, you are responsible for collecting the correct amount of sales tax on transactions that pass through your business and transferring those funds to the appropriate government agency in a timely manner.

There is no federal sales tax, so you will primarily be concerned with state and local governments, some of which may also require you to obtain a sales permit or complete other documentation relating to sales tax reporting.

The process of sales tax collection would be much simpler if everyone was charged the same amount of sales tax on every purchase, regardless of who they are or where the purchase occurs.

However, that's not how the system works. Instead, states and municipalities have different sales tax rates, and some purchases are exempt from sales tax altogether. You'll need to contact your local Chamber of Commerce for details about collecting sales tax in your area.

In the meantime, you should be aware of some general exemptions that apply across the board as well as some gray areas in sales tax reporting that you may need to resolve.

Sales Tax Exemptions

There are several types of purchases that are exempt from sales tax. For these purchases you are not required to collect or report tax, but you are required to obtain a copy of the purchaser's tax-exempt certificate or tax-exempt number typically issued by the state.

The first exemption category involves items that are purchased in order to be resold later. This means that retailers and wholesalers do not have to pay sales tax on wholesale purchases since it is assumed that the item will be taxed when it is ultimately sold to consumers.

Another common exemption category is for nonprofit organizations. Nonprofits are issued tax-exempt status by the state and are not subject to sales tax on purchases. Even so, it's your responsibility to ensure that the purchase is being made on the organization's behalf and not for personal use by someone who works for the organization.

Gray Areas in Sales Tax Collection

The big gray area in sales tax collection has to do with transactions that occur in a state where the seller does not have an actual physical presence. If your company has a store or sales representative in a specific state, then it is clear that you are responsible for collecting sales tax on purchases. But what if you don't have a physical presence and conduct your business in the state through mail order or over the internet?

The law is not entirely clear in this area, but generally speaking most retailers do not collect sales tax in states in which they do not have a physical presence. Some states have attempted to impose legislation to force businesses to collect interstate sales tax, but these laws are difficult to enforce and murky, at best. If you're not sure how to proceed, contact your attorney for counsel and advice.

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We greatly appreciate any advice you can provide on this topic. Please contribute your insights on this topic so others can benefit.

  • LeAnn posted on 1/18/2009
    I have a question maybe someone can answer. I have a pottery business in Indiana but I travel to Michigan and Ohio for art fairs. Do I have to pay Indiana sales tax on sales that occur in other states?
  • mike posted on 3/14/2009
    i must be missing something vitally important but in my innocent eyes the simplest solution would be this: make all retailers collect sales tax on all sales regardless of where the purchaser is.....all sales tax collected gets paid to the the local and state agency where the retailer is incorporated.... wouldnt that be the quickest and easiest and most fair way to setle would certainly encourage states to promote the growth of their retail business on the internet.... this makes the most complete logical sense to me that the store doing the selling is collecting the sales tax on every sale....just like a brick and if the internet customer is actually in that local and state area which in a sense they are since their internet connection "takes" them into that state???? makes sense to me and solves ALL the headaches associated with all the various laws currently involved in trying to remit tax to the states where people make purchases from.... so why not...what am i missing?????
  • leona posted on 9/3/2010
    do you have to pay sales tax on invoices, brochures, etc. to run your business?
  • lc posted on 3/28/2011
    Mike, A retailer is supposed to collect taxes (internet sales) for the state that they are in to residents of the same states. to force the internet companies to charge sales tax for their own state would lose a lot of competitive advantage. further more there are only a few states that don't have a sales tax, we enjoy that perk. The states that don't have a sales tax i.e. NH would see a very large rise in new businesses where as states with taxes would lose businesses for the sake of competitive advantage.
  • KT AvaDiva posted on 9/28/2011
    KT AvaDiva
    @LeAnn - I would suggest you check in with the Ohio and Michigan gov't website to see what they constitute as "Nexus" (presence that requires you to collect and remit sales tax for sales you within that state) - it is possible that for a certain amount of time during or after the fairs that you will have nexus and need to collect and remit. Each state is diff. @Mike - very interesting way of thinking about it :-) @Leona - If you are purchasing brochures to run your business, if you are not charged sales tax by the vendor you purchase from (bc they may not be req to charge sales tax in your state) - check with your state gov't bc you may be required to pay use tax.

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