For taxes, one of the most important things you need to consider is the sales tax for small businesses. Every business, even a limited liability company, needs to pay the sales taxes as a part of the compliance requirement decided by the Department of Revenue. Hence, most business owners are always concerned about getting the sales tax permit, understanding the sales tax rates, and so on. On this page, we explain everything about the sales taxes and other related facts.
On this page, you’ll learn about the following:
What Is Sales Tax?
Taxes are the amount you need to pay back to the government as a part of fees for allowing you to do business in the state or country. These taxes are the main source of revenue for different governments, including sales taxes.
A sales tax is actually a consumption tax that the government imposes on the sale of any good or service. These goods and services can be of any form. From the name itself, you can understand that the tax is levied only on the point of sale, i.e., the moment a selling transaction is made between two parties, which can be between businesses, a business and an individual, and between individuals.
Types of Sales Tax
According to the industry, there are four different types of taxes that are levied on a business at the point of sale. These are:
This tax is levied when one entity is selling something to the other, be it a good or service. For example, let’s suppose an LLC business is selling its services to a group of locals in the city of Michigan. Now, the customer needs to pay a sales tax to the government when he buys the service from the Michigan LLC. Similarly, if your business is selling clothing to a retail shop, the shop owner will pay the sale tax since it is buying the goods from your business. These taxes are the main revenues for both the state and the federal government.
A use tax is a necessity when a purchase does not fulfill the requirements of sales tax. Following are the conditions under which the use tax is levied:
- When you are selling your service or goods to another person or business in other states with no sales tax rules.
- If the seller is not qualified for paying the sales tax, the use tax will be implemented.
- When you are ordering a catalog from an online shop, and the mode of delivery is email.
Exemptions are allowed to the consumer in many states where he is purchasing goods necessary for survival like groceries, clothing, and others. Here, the sales tax rate is lowered so that one can enjoy the saving of money during a transaction.
When the business sale consists of goods not required for survival, like alcohol, tobacco, and others, the government will apply the excise tax on the cost of the goods. This particular tax reduces the risk of doing such business for both the manufacturing companies and the resellers.
Taxable Goods and Services
The main advantage of sales tax is that it is not applicable to all the goods and services that the buyers get in a particular state or country. When you are involved in a business, you need to understand which goods and services are taxable and which aren’t.
Any tangible product or property will be taxed under the goods section, no matter what kind of business services you are offering. Here are some of the examples of a taxable product against which the department of revenue will levy a sale tax.
- Rental and personal properties
- Furniture units
- Home appliances
- Raw materials
- Gardening items
Not all businesses come under the rules of sales taxes. Hence, you need to identify whether your business services are applicable for sales tax nexus or not. Here are some examples of business taxes that you have to pay in your county or city.
- Services provided to any component of property like construction, installation, property maintenance services, and so on
- Services provided to any real property like snow removal, lawn mowing, repairing, and so on
- Businesses services like an advertisement, consultations, hiring of employees, and so on
- Personal services like pet grooming, personal care, dry cleaning, and others
Importance of Sales Tax for a Small Business
Before you form an application to gain access to the sales taxes forms, you need to understand the importance of the same for the businesses.
- According to the sales taxes regulations, the revenue earned by the government will be used for community development, be it in the construction of public schools, parks, roads, or anything else.
- For public services and development situations, the government collects the sales taxes and uses them for the same.
- The protective services like the police force and the army expenses are somewhat gathered from the sales taxes paid by several businesses across the US.
Ways to Register for Sales Tax
As an employer or one of the active vendors in your state, you will need to pay the sales taxes. However, before you talk about the sales tax nexus and the sales tax return, you need to learn the way of registering for the sales tax.
Get the Seller’s Sales Tax Permit.
For both offline and online sellers, it is mandatory to gain a sales tax license or permit. The sales tax laws vary from one state to the other, and hence you need to connect with authority to know more about the process of registering yourself as compliant to pay the sales taxes.
- Visit your state’s sales tax legislative online website.
- Click on apply for a sales tax permit and fill up all the necessary details. These details will be related to your business structure.
- At the time of filling up the details, make sure to keep the business formation paperwork close-by since one wrong detail and your request will be canceled. Also, you will need your EIN number for applying.
- If there is a registration fee, you will have to make the payment at the time of submitting the application.
Calculate Sales Tax Obligations
The sales tax calculation depends on three main sales tax types, which we have discussed here, irrespective of the businesses or the products.
When you are involved in the traditional business of selling goods or services on the site of the business itself, you will have to consider the store sales. Here, the sales tax return is the same for everyone.
If you are providing the services to different places within the same state, the in-state taxes will be levied.
Destination-Based Sales Tax
Businesses like Amazon and others have to pay this particular tax where it is calculated based on the address of the customer, especially when the purchase is made online.
Origin-Based Sales Tax
The origin-based sales tax is the one where the rate is calculated based on the origin address of the seller doing the business.
For the out-of-state taxes, the business needs to have the nexus, and then only one will be compliant to pay the said tax.
How to Pay Sales Tax for Small Business
To pay Sales Tax for your small business, you need to determine whether your product/service is subjected to Sales Tax. If liable, you need to register for a Sales tax permit.
If you own a small business, you may wonder how to pay sales tax. Your state requires that you file a sales tax return at least once a year. The frequency of filing a sales tax return depends on the size of your business and how often you sell goods or services. Most states require businesses to file a sales tax return monthly or quarterly, though some require quarterly filing. If you do not collect sales tax, you must file your return anyway, or risk being charged a failure-to-file penalty.
It is important to remember that the government doesn’t always charge sales tax on certain services, such as retail services. Although retail services are usually taxed, other services, like doctor’s visits, are not. Also, each state has different rules about what items are taxable. While Pennsylvania does not charge sales tax on clothing, Maryland does. If you sell to customers outside of your state, you may need to collect sales tax from that state, as well.
After deciding on the type of sales tax you will charge, it’s important to set up a sales tax system and register with your state’s taxing authority. You may also be required to obtain a sales tax certificate if you plan to sell free goods or rent goods. Many states offer online resale certificates. By collecting sales tax from your customers, you can avoid costly audits and fines.
Whether you are an online retailer or a brick-and-mortar store, identifying taxable and nontaxable goods is a crucial step in running a successful small business. Keeping accurate records is an essential part of running a business, and will ensure that you pay your taxes on time. For example, you should keep receipts for every sale you make, and you should maintain a record of each transaction.
The Streamlined Sales Tax Governing Board provides state-by-state updates, but it’s important to check with individual states before you make any decisions about your tax obligations. Non-compliance with sales tax laws can have major consequences for your business, so make sure you stay current with changes. For your own peace of mind, consider purchasing a sales tax software program to help you keep up with sales tax changes.
You can choose to pay sales tax on all of your products, or you can collect it at your customer’s expense. A simple way to collect and remit sales tax is to register with your state’s business commission. This way, you can claim your profits tax deductions and save money. However, remember that some products may be exempt from sales tax. You should check the terms and conditions of sales tax and other laws to ensure compliance.
There are many exceptions to sales tax, such as personal services, and tangible goods. Each state has its own rules and regulations for what is not exempt. A buyer must present a valid exemption certificate to qualify for the exemption. The exemption certificate is an important document that proves that the buyer is exempt from paying sales tax. There are also universal exemptions based on the type of goods and the use of property.
Sales tax nexus is a legal term used to determine whether a business has any physical presence in another state or not. Several forms of nexus are present, like a physical address, a marketing affiliate, a temporary office location, and so on.
No, not all the products being sold are taxable. It is only the tangible properties that come under the sales tax department.
Sales taxes are paid on the sales of the company. For a small business, the burden of the sales tax is much less. In this article, you have learned the types of sales taxes and how it works for a small business. To pay the sales tax you need to register your business with the state tax department. File your sales tax return to be up-to-date with the regulations.