Sales Tax

Information About Sales Tax for New Business Owners

Sales Tax Information

Sales tax audits are the most costly audits for small business. Don't make a mistake – all new business owners need to know the facts: incorporating or setting up an LLC will NOT protect you from sales tax liabilities.

Our CPAs will help your business:

• Prepare your sales tax returns
• Identity which products and services on nontaxable and exempt
• Handle all sales tax audits and correspondence

A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. It is collected by the business for the state or local government. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale. Generally, Sales tax is collected and paid on a monthly quarterly or annual basis. Some states make filing the sales tax report and paying the liability electronically, the mandatory means of payment.

A portion of the sale may be exempt from the calculation of tax, because sales tax laws usually contain a list of exemptions. Laws governing the tax may require it to be included in the price (tax inclusive) or added to the price at the point of sale. Most sales taxes are collected from the buyer by the seller, who remits the tax to a government agency. Sales taxes are commonly charged on sales of goods, but many sales taxes are also charged on sales of services. Advantages that a sales tax generally has over other forms of taxation are that it is difficult to avoid, and simple to calculate and collect.

In the United States, every state with a sales tax law has a use tax component in that law applying to purchases from out-of-state mail order, catalog and e-commerce vendors, a category also known as "remote sales". As e-commerce sales have grown in recent years, noncompliance with use tax has had a growing impact on state revenues. The Congressional Budget Office estimated uncollected use tax on remote sales was projected to run as high as $54.8 billion for 2019. Enforcement of the tax on remote sales, however, is difficult. Unless the vendor has a physical location, or "nexus", within a state, the vendor cannot be required to collect tax for that state.

In the United States, online retailers who have no physical presence in a given state can ship goods to customers there without collecting that state's sales tax, because as of 2011, there is no federal sales tax. Businesses can reduce the impact of sales tax for themselves and their customers by planning for the tax consequences of all activities. A employer can avoid sales tax problems by considering the following policies.

When designing invoices consider separating components to reduce the taxable portion of a sale transaction. In some states, a delivery charge is exempt from the tax when stated separately from handling and other taxable charges. For employers with locations in multiple states, when selecting the location for new facilities, they should consider jurisdictions with no sales tax or broad exemptions for certain types of business operations would be an obvious consideration in selecting a site for a new manufacturing plant, warehouse or administrative office. For a businesses operating in several jurisdictions, choosing the best location in which to take delivery can reduce or eliminate the sales tax liability. This is particularly important for an item to be sold or used in another jurisdiction with a lower tax rate or an exemption for that item.

Businesses should consider whether a temporary storage exemption applies to merchandise initially accepted in a jurisdiction with a higher tax rate. Review of company purchases to determine whether tax was paid in error for equipment and supplies qualifying for exemptions, especially in jurisdictions with broad manufacturing exemptions. Some jurisdictions allow refunds as long as three to four years after the tax was paid. Periodic review of record-keeping procedures related to sales and use tax. Proper supporting detail, including exemption and resale certificates, invoices and other records must be available to defend the company in the event of a sales and use tax audit. Without proper documentation, a seller can be held liable for tax not collected from a buyer. Steep penalties are imposed on businesses for not filing and non-payment of sales tax.

Rosedale & Drapala, CPAs can help you implement procedures to minimize exposure and with the requirements of sales tax compliance in your state.