Sales Tax 101
July 20, 2015
You want to open a business. You know almost exactly how much it will cost to start; supplies, furniture, rent, utilities, etc. But, what about sales tax? As a new business owner this will be one of the first taxes you will pay once you start selling your product or service. After setting up your company either as a sole proprietor, partnership, LLC, etc., you will need to visit the State Comptroller’s Office to find out about your sales tax responsibility.
Unfortunately, collecting, calculating, reporting and paying sales tax can be confusing, overwhelming, and sometimes complicated for first time business owners. To help you understand sales tax, I would like to share some general information I discuss with my clients during their visit for an advising session.
Basically, sales tax is the percentage of money a business collects for the government when selling taxable items, tangible personal property or taxable services. Of course like in anything, there are exemptions for certain categories and organizations. Each state offers its own set of exemptions from sales tax. This is why it is extremely important for small business owners to know the applicable state and local tax rules and which exemptions apply in a particular jurisdiction, product or service.
It is for the benefit of the business to be informed. Sales tax is a subject that can’t be taken lightly. Many business owners are falling into the double taxation category when purchasing taxed products and reselling while charging tax. To avoid double taxation, it is important to purchase the products tax free when they will be used as a taxable resale item. You can do this by presenting a resale certificate provided by the State Comptroller’s office to the supplier/vendor. This resale certificate will make you responsible to collect sales tax once you sell the product, therefore you will include sales tax in the product you are selling. Using and accepting a resale certificate involves great responsibility, consequently, the more informed you are, the better off you will be.
Another common mistake in sales tax collection/reporting is the lack of control of items sold or gifted. Often, many small businesses use the marketing strategy of gifting products to new or loyal customers as a thank you token. But, giving away products that were purchased tax free obligates the business owner to be responsible of the tax that corresponds to the gifted product.
All these instances can be the cause for a business to be subject to an audit and, as a result, having to pay fines for the inaccuracy when collecting and paying taxes. Taxes are not an easy subject but understanding as much as you can will make you a better and, hopefully, a more successful business owner.
But how do you keep up with all these rules? My best advice is to visit the State Comptroller’s Office. It is important to have their phone number available at all times, and if you have access to the internet, visit their website. It has the most up-to-date information and is available 24/7.
I wish I could give business owners all the answers regarding tax regulations. However, when it comes to sales tax law, the best option is always contacting the primary source of information.