20-Minute Guide to Sales Taxes for Small Business Owners
For some small business owners, sales taxes can be a huge nightmare because sales tax laws are different in every states, counties, and cities. Even for tax professionals, sales tax is a complicated subject to deal with.
A general understanding of sales taxes can guide you to effectively mitigate risks arising from sales tax compliance with some help from sales tax professionals.
1) What is sales tax?
Sales tax is a transaction-based tax imposed by state and local governments that is paid by the purchaser for goods and services. It is a requirement for all businesses to assess and collect appropriate sales taxes and remit to relevant authorities within the specified time. Sales tax rates vary, and some states do not impose any sales taxes at the state level but counties and cities may impose sales taxes. Also, it is important to check and verify sales tax rates as they change.
2) Are all sales of goods and services subject to sales tax?
No, not all sales of goods and services are subject to a sales tax. This is where sales tax laws get confusing and complicated. The sales of goods are subject to sales taxes and the sales of services are not. However, depending on state and local governments, certain goods and services are exempted from sales taxes such as resold goods, raw materials, and non-profit sales. It is important to consult with sales tax professionals to ensure that you are not imposing wrong sales taxes on your customers and mitigate your risk of penalties and fines.
3) How do I submit collected sales taxes?
First, you need to check with your state to see if you need to obtain a sales tax permit to collect and submit sales taxes. Generally, states impose sales taxes requiring businesses to remit collected sales taxes on monthly or quarterly basis. Also, some states require periodic prepayments. Further, you will have to report and file all sales, taxable sales, exempt sales and amount of tax due using special forms. Check with your state or local government in your location about the process.
4) What is nexus?
You often hear about a term, "Nexus", while you are reading about sales taxes. Nexus is a term describing an establishment of physical presence in a state. This is a complicated and sensitive subject for many retailers, especially for online retailers. Generally, if your business has an employee or physical location such as warehouse, office, etc. in other state, your business is more likely to have a nexus in the other state. Note that each state has different definition of nexus so it is important to check with your sales tax professionals. If you have a nexus, it means that your business might need to collect and remit sales taxes for the other state. This is a complicated matter that should be consulted with a sales tax professional.