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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. For an LLC, it has pass-through taxation by default which means, they do not have to pay any taxes as a business. However, they are required to pay the sales tax if needed.
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:
Sales Tax
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.
Use Tax
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
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.
Excise Tax
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.
Goods
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.
- Vehicles
- Rental and personal properties
- Furniture units
- Computers
- Home appliances
- Raw materials
- Gardening items
- Books
Services
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.
Store Sales
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.
In-State Sales
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.
Out-of-State Sales
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.
First and foremost, it is crucial to understand your sales tax obligations. Different states have different sales tax laws and regulations, so it is essential to familiarize yourself with the specific rules that apply to your business. This includes knowing what items are subject to sales tax, the tax rate applicable in your state, and when and how often you are required to remit the tax.
Next, keep accurate records of all your sales transactions. This includes keeping a record of all sales receipts, invoices, and other relevant documents. By maintaining detailed and organized records, you can easily track your sales tax liabilities and ensure that you are not under or overpaying.
Another important step is to set up a system to collect and remit sales tax. If you are selling goods or services that are subject to sales tax, you need to collect the tax from your customers at the time of the sale. It is essential to clearly itemize the sales tax on your invoices so that your customers are aware of the additional charge. Once you have collected the sales tax, you must remit it to the appropriate taxing authority, usually on a monthly, quarterly, or annual basis.
Online sales have added an additional layer of complexity to sales tax compliance for small businesses. If you are selling goods or services online, you may be required to collect and remit sales tax in states where you have a nexus. A nexus is a significant connection between a business and a state that triggers a sales tax obligation. This could be established through various factors, such as physical presence, economic nexus, or click-through nexus, so it is crucial to understand the rules that apply to your online sales.
To simplify the process of paying sales tax, many small businesses use accounting software that can help track sales tax liabilities, generate sales tax reports, and even file sales tax returns automatically. This can save valuable time and help reduce the risk of errors in calculating and remitting sales tax.
Lastly, do not hesitate to seek professional help if you are unsure about how to pay sales tax for your small business. Accountants, tax advisors, and other professionals can provide valuable guidance and ensure that you are fulfilling your sales tax obligations correctly and efficiently.
In conclusion, paying sales tax as a small business owner may seem overwhelming, but with a clear understanding of your obligations, diligent record-keeping, and the right tools and resources, you can manage your sales tax responsibilities effectively. By following these tips, you can navigate the complexities of sales tax compliance and focus on growing your business.
F.A.Qs
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.
In Conclusion
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.