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 are in the business of selling goods and services to the public, then you need to pay sales tax to the state. However, how do you go about doing this? You must file a sales tax return with your state and remit the taxes that are collected. You must also file a sales tax return if you have collected no sales tax. Failure to file your sales tax return can result in a failure-to-file penalty.
To make sure that your business is compliant, you should know the rate of sales tax in each state. Different states have different rates of sales tax, so make sure to check with your state tax revenue department before making any purchases. Alternatively, you can use a business tax service that does the calculation for you. This will be beneficial if you sell goods or services that require more than one state. To avoid any problems, you can hire a sales tax service that works with your sales tax calculation software.
As you can see, sales tax is a complicated issue for small businesses, and collecting and remitting the taxes is crucial. Failure to do so can lead to penalties and interest, so it is vital that you understand the rules and regulations. There are several exceptions to this rule. For example, if you are selling products that are not exempt from sales tax, you must charge these customers with a tax rate of at least six percent.
To start collecting sales tax from customers, you must apply for a sales tax certificate. You can apply for one from your state’s revenue department for free. The sales tax certificate is required if your business sells tangible goods. Many states offer this free of charge. You can download a sales tax certificate from their websites. By paying sales tax, you can avoid fines and costly audits. This article outlines how to pay sales tax for your small business.
Depending on the type of products or services you sell, your state will have its own sales tax requirements. In some states, you may be required to register with a state taxing agency, even if you are selling online. Once you register, you must also create processes to collect sales tax from your customers. Depending on the nature of your business, you may sell your products online or through retail stores. In either case, it is important to keep records of sales tax in order to avoid paying double taxes.
Once you’ve established your sales tax nexus, you can focus on the finer details of how to pay sales tax. Your sales tax nexus is where your business has a physical presence and a physical address in the state. You can also count remote employees, contractors, warehouses, and distribution centers as locations. It’s important to understand this before you expand your business. It is important to pay sales tax for your small business before it becomes too large.
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.