Sales Tax for Small Businesses
Sales tax is determined on a state level, and most states do require some rate of sales tax on purchases of goods and most services. It can be tricky to determine what rate you should collect, especially when doing business in differing jurisdictions/states.
How much you should source
45 of the 50 sates have sales taxes, so chances are you need to be collecting and filing taxes for your state on all goods and services you sell. State rates do fluctuate monthly, so be sure to check before you file. Find a state tax guide here.
Local tax rates are also often a tax that business owners are responsible for filing and can be based on the city or jurisdiction that you OR your customer/client reside.
There is also a type of excise tax called a use tax that can be incorporated in state tax rates. This is mostly used for out-of-state purchases and is not usually the responsibility of the seller to file. Unless your company has a physical presence in the state of purchase, your business does not need to collect sales tax from customers purchasing in another state.
There are differing sales tax exemptions among various states, so it is dependent on your jurisdiction. There are a few universal exemptions that can apply based off of the use of the product, type of product and identity of the purchaser.
Type of Property Exemption
In some states, certain specific products are exempt or taxed at a lower rate. Examples include products that individuals have to buy such as food, medicine, and medical devices. Other instances like garage or estate sales are often exempt from sales tax.
Property Use Exemption
Any items that qualify as wholesale - being resold - are exempt from sales tax. These include raw materials that turn into working capital. There are also exemptions for products intended to support industries like industrial processing, agriculture, and manufacturing that promote activities for public good (like pollution reduction).
Identity of Buyer Exemption
Certain institutions are exempt from all sales tax. These organizations include:
· Religious establishments
· Educational organizations
· Federal government and federal agencies
· State government and state agencies
· Other local jurisdictions
Once you have determined if the product is non-exempt, acquired a permit, and calculated the rate appropriate to your jurisdiction, you then need to send the sales tax return and payments to the state. You can use accounting software to do this, like QuickBooks. Whether you have an accounting service help or choose to try it on your own, just be sure to pay attention to your state’s deadline for filing. Making sure you submit on-time is just as, or even more important than filing completely perfectly.
Tax season can be daunting, and most companies don’t do it alone. There are many accounting and bookkeeping services you can use to supplement any lack of experience you may have in this area. Just be sure your bookkeeper is able to work with your accounting software and is someone you trust.
Looking for some help with taxes? Contact us.