In addition to business taxes required by the Federal government, small businesses have to pay some State and local taxes. Each State and locality has its own tax laws. Having knowledge of your State tax requirement can help you avoid problems and help your business save money. As a small business owner you need to be aware of your Sales Tax obligations: what is taxable; how the tax is computed and calculated; and how Sales Tax is reported and paid.
To help ensure that you do not pay any more Sales Taxes than you are absolutely required to pay or that you do not receive an unexpected visit from an assessment-waving Sales Tax auditor, you should have some knowledge of the following areas:
- What are Sales Taxes? And, how are they different from “Use” taxes?
- Who is the taxpayer for Sales Tax purposes?
- What types of transactions are taxable?
- What role does a seller have in collecting Sales Tax? Does the buyer have any responsibility?
- How is the tax generally computed?
- How are Sales Taxes reported and paid to your State government?
Sales Taxes are imposed by the State for transactions that occur within their borders. In most States, Sales Tax is most often triggered when there is the consummation of a retail sale. Initially, the States were content to limit their taxes to retail sales of tangible personal property. However, in recent years, most States have expanded the scope of their Sales Taxes to encompass leasing transactions and some services.
Generally, each retail sale is presumed to be taxable. However, most states allow some exemptions from Sales Tax, usually based on the type of item sold (or service provided) or upon some characteristic of the purchaser. As the business owner, you are responsible for knowing what items are taxed at which rates. However, in most cases, the purchaser must affirmatively establish his or her right to claim the exemption. For example, the purchaser may provide evidence that he is making the purchase for a tax-exempt organization.
There are actually several different types of Sales Tax systems in use throughout the United States. The biggest difference is whether the seller or the purchaser is the main taxpayer. In some States, the tax is imposed on sellers, who then have the option of passing the tax along to their purchasers. In other States, the tax is imposed on the purchaser, with the seller being responsible for collecting the tax and remitting it to the State. And then there are other States where the liability for the tax is shared by sellers and purchasers.
In general, Sales Taxes are computed on some measure of gross receipts. In other words, the tax generally applies to the full amount a seller receives from a purchaser as opposed to the net profit the seller realizes on the sale.
What Are the Different Sales Tax Systems?
When we use the term “Sales Taxes” in a generic sense, we are referring to the taxes that States impose on retail sales. However, States differ in whether the tax is imposed upon the seller, the purchaser or on the transaction itself. Knowing the taxing rules in your State is important because the type of sale tax system determines:
- Who can be liable for the tax,
- Who can sue on the tax, or
- Who can make a claim for refund of the tax.
There are three general types of Sales Taxes:
1)Seller (Vendor) Privilege Taxes. These taxes are imposed on retailers for the privilege of making retail sales in the State. Retailers usually have the option of absorbing the tax (that is, paying the tax out of their own pockets) or passing it along to their purchasers.
2)Consumer Excise (Sales) Taxes. A Consumer Sales Taxes are imposed on the person who makes retail purchases in the State. In the States that impose this type of tax, sellers purely serve as agents who must collect the tax on the State’s behalf. Because the tax is primarily the purchaser’s responsibility, sellers do not have the option of absorbing the tax and usually must separately indicate the tax on the receipts or invoices they provide their purchasers.
3)Retail Transaction Taxes. These taxes are imposed on the retail sale transaction itself, with the primary liability for paying the tax falling upon both the sellers and the purchasers. Sellers are responsible for collecting and paying the tax to the State, and purchasers are responsible for paying the tax. In essence, this type of Sales Tax is a hybrid of the other two types. Operationally, however, it is closer to a Consumer Excise Tax because sellers are not given the option to absorb the tax.
The vast majority of States have a consumer sales tax, where the buyer bears the legal burden of the tax and the seller is required to collect and remit the tax to the State.
As a general rule, a State’s taxing power reaches only as far as its borders. What this means for sales tax purposes is that a State cannot impose its sales tax on retail sales that are consummated in other States.
