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.
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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