Completing sales tax responsibilities is an often confusing and irritating part of owning a small business. As online sales have experienced tremendous growth in recent years, the complexity of these duties has only increased.
Most states in the United States impose sales taxes on goods and services. These taxes are administered at both the state and local levels, and in some cases, the local tax rate may be higher than the state rate. Small business owners need to be aware of the sales tax laws in their state, as they vary widely and can pose a challenge to keep track of.
What Is Sales Tax?
Sales tax is an extra charge consumers must pay when purchasing goods or services within a certain jurisdiction. This charge is added to the price of the item or service and is collected by the local government. Sales tax is usually calculated depending on the location of the buyer and varies from state to state.
A sales tax generally applies when an individual buys something tangible—an object that can be seen, felt, touched, weighed, or measured—from a retail store. However, the exact regulations of this tax may differ depending on the state. It may cover services too.
The seller is accountable for obtaining the sales tax from the customer and forwarding it to the relevant governmental entity. This applies to all sales transactions, whether a cash transaction, credit purchase, installment payment, layaway sale, or a deal involving an exchange or trade-in, unless otherwise exempted. The buyer must pay the sales tax, though the seller is responsible for collecting it and submitting it to the appropriate government body.
It is important to remember that the Internal Revenue Service (IRS) is not responsible for the administration of sales taxes. Instead, sales taxation is regulated by individual states, counties, and cities. This can lead to a complex and confusing system for businesses to navigate, with varying rates and regulations in each jurisdiction.
Taxable Goods
Taxation can be applied to many different types of goods, but some of the most common items that are typically subject to taxes include items that you buy, rent, or use that are subject to taxation. This includes furniture, cars, computers, home appliances, electronics, books, toys, raw materials (such as cloth or lumber), gardening items and plants, and rental properties. Unless an exemption is stated, it can be assumed that these items are subject to taxation.
Taxable Services
Sales taxes are taxes that are applied to goods and services when they are purchased. These taxes vary depending on the state or country, but some of the most common taxes include taxes on items like alcohol, cigarettes, gasoline, and other items.
Taxable services encompass a wide range of activities, from personal property services like fixing and maintaining items for customers to real property services such as lawn care and snow removal to business services like advertising and consulting, and finally to personal services like beauty treatments and pet grooming.
Sales Tax Exemptions
Business owners need to be aware of their state’s sales tax rules and the various exemptions that apply. To take advantage of an exemption, buyers must provide a valid certificate that shows their permission to be exempt from sales tax. It is the buyer’s responsibility to provide this certificate and ensure that all the requirements for exemption are met.
Businesses need to look at their state regulations to see if they are eligible for an exemption. Certain types of goods or items are always exempt, no matter who buys them or what they are used for.
Conclusion
Sales tax is a significant concern for small business owners that must be considered when calculating the cost of goods and services. Knowing the sales tax rate in a business’s jurisdiction is essential for accurately calculating sales tax.
Additionally, the sales tax must be collected from customers, and the correct amount of sales tax must be paid to the appropriate state and federal government agencies. Understanding sales tax regulations can help small business owners keep their businesses running smoothly and legally. Read on to Part 2 of this blog to know more about collecting and reporting sales taxes.
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