What Every Business Owner Should Know About Sales Tax and Nexus!
Many business owners fall behind on sales tax simply because they’re unsure of what it is, how to pay, or the requirements. This article will guide you through necessary details on sales tax, Nexus, and what it all means to you as a business owner.
First, it’s crucial to note that sales tax is not income kept by the business. But instead, the seller collects these taxes by their agreement to conduct business in the City or State they operate. Sellers are then obligated to produce forms and remit taxes to the state and local government. Payments are made either monthly, quarterly, semi-annually, or annually.
What is sales tax?
Sales tax is an allowance tax. It is a percentage of goods or services sold. This percentage is collected from the customer, at the time of sale, by the company. Most states collect sales tax, with a few exempt states.
Below are the five states exempt from collecting sales tax:
- Alaska
- Delaware
- Montana
- New Hampshire
- Oregon
States and local governments who collect taxes uses them to finance fixing roads, building parks, or putting them towards schools. Do note that sales tax only applies to states, local counties, and local municipals, NOT Federal.
How To Pay Sales Tax for Small Businesses?
To pay sales tax, you can go to your State’s Department of Revenue website. Some State’s may call it Department of Taxation and Finance or Department of Treasury.
For example, in the State of New York, it is Department of Revenue is called New York State Department of Finance and Taxation. Whereas, in Arizona the name changes to Arizona Department of Revenue and in Michigan, it is Michigan Department of Treasury. Each State may have different titles, however, once you search your local “department of revenue” the name should pop up.
Next, scroll down and search the “Sales and Use Tax” section. If it’s not readily available, enter sales tax in the search bar and it should direct you to the appropriate page. From there, you’ll need to create an account or log in to an existing account.
Finally, you’ll be able to input your business data and pay your sales tax online. You also have an option to print the form and mail it to the address provided on the form.
To comply with tax legislation, you must:
- Establish your responsibility for collecting sales tax in your State (you can easily access each State’s webpage on the IRS website)
- Request a sales tax permit with the State in which you conduct business in
- Calculate the rate of sales tax needed to stay compliant
- Collect tax liability at point of sale
- Keep your books up-to-date with detailed records of the sales tax collected (Bookkeeping records are crucial to avoid penalties)
- Report and pay sales tax to each relevant State you do business in
If you need help with reporting and remitting sales tax, consider hiring a professional Accountant like myself. Visit my QuickBooks Online Accountant page to inquire about my services.
What Does Sales Tax Include?
Each State will determine its specific requirements. Nonetheless, states have similarities in answering “what are taxable items”. Most states apply sales tax to tangible products. Such products include items you can feel, see, or otherwise observe. For example, a stove, a pen, or a toy qualifies as tangible items.
On the flip side, most services are not taxable; however, a select few are taxable services. We’ll touch on this in a bit.
Sales tax doesn’t end at charging consumers and remitting payments for goods and services. Once you’re registered to charge sales tax, a return must be filed, even if no sale occurred in that period. You can file either monthly, quarterly, or annually. The frequency depends on your State.
Do I Need to Charge Sales Tax for Services?
Yes, you may need to charge sales tax on services carried out on tangible products sold.
Let’s dive into an example.
Suppose a business charges service fees such as installation or repair fees for appliances sold to a client. When the business owner sells the stove and adds installation fees, the owner must pay sales tax on both the stove and the service. Therefore, the sales tax includes the appliance plus the service fee, which should be charged to the consumer.
Although taxes vary by State, here are five types of services that can be subject to sales tax:
- Tangible Personal Property Services – These are improvements or repairs to personal properties, such as a car or appliance repair.
- Real Estate Property Services — This includes work on buildings or lands like gardening or janitorial services.
- Business Services – Services for companies such as call centers or credit reporting.
- Personal Services — This can be tanning or other services such as pet grooming.
- Entertainment Services— this can be amusement parks and events like concerts or professional sports.
On the contrary, professional services such as legal work, healthcare, accountancy, and other services are often not taxed.
What Happens if You Don’t Collect Sales Tax?
There are consequences if you don’t collect sales tax. The severity depends on the intent. Not complying or reporting sales tax can range from costing your business thousands of dollars to facing jail time.
Below are three essential things to remember in the case of sales tax payments:
- Not collecting tax from customers can cause the business owner to pay out of pocket. This can be costly and increase tax liability. States can impose back taxes and P&I (penalties and interest) to the balance due. Such penalties differ from State to State, but P&I can generally add up to thirty percent of the sales tax owed. For example, if you have a debt of $10,000 of sales tax, you will have to pay an average of $3,000 in fines and penalties.
- The State can either put a lien on your business or shut it down entirely. Depending on your business structure, a lien can be placed on your business or personal property. The State can also shut down your business for intentionally submitting or reporting fraudulent information.
- Business owners can be subject to criminal sanctions if it is proven that the intentions of deceiving the State are there.
As stated previously, if you intentionally avoid paying taxes, it becomes a crime. Illegal sales tax fines are among the worst.
Illegal consequences often arise if:
- Sales tax is purposely not paid due to tax evasion.
- Knowingly prepared or assisted a substantially fraudulent or misleading return.
- The relevant document was simulated or falsely executed or signed to hide a material fact relating to a tax.
Now to the good stuff!!
What Does Nexus Mean in Sales Tax?
Many business owners get confused with the term Nexus. So, what is Nexus? Nexus simply means “significant presence” in a state. It refers to the relationship between a seller and a state. Having sales tax Nexus requires you to register, calculate, and collect sales tax.
Whether a business owes taxes to a specific jurisdiction relies on how the State defines Nexus. Each county has a different nexus definition, but most agree that “physical presence” or “economic relationship” produces connections.
What Determines Nexus in a State?
Nexus in a state is dependent on whether the company is physically or economically participating in the State or not.
Let’s look at what triggers Nexus down below:
- “Physical Presence” like an office, a store, a restaurant, or even a home office within a particular state. (This includes having multiple branch locations). Each branch location is subject to Nexus.
- Employee location. (This is resident workers in the State)
- Delivering and distributing goods such as drop shipping or a distributor company.
- Inventory storage.
- Advertising or affiliates. If you advertise online or use affiliates to get business, you may trigger Sales Tax Nexus.
- Temporarily undertaking physical activities in a state for a limited time; for example, a trade display or trade show.
- Economic presence. (This removes physical presence and replaces or adds sales or transactions to define its relationship with the state).
How Does Sales Tax Work When You Sell Online?
Even if an online store or vendor does not have a physical presence in a State, some states may still charge sales tax. This is called an Economic Nexus. E-commerce or online stores pay sales tax on revenue if it exceeds the Economic Nexus threshold in that State. If a vendor sells in multiple locations and Economic Nexus is established, you must register for a sales tax permit, collect taxes, and file a sales tax return in EACH State. Online vendors who do not exceed the threshold do not have to pay or collect sales tax, other than the taxes in their home state.
Do note, the evolution of the internet has made it more susceptible to investigate online companies closely for not paying nexus sales taxes.
How to Calculate Sales Tax?
You must multiply the product’s total price by one plus the sales tax rate to calculate sales tax. You can then subtract the total sales price by the total cost of the product.
Let’s calculate the tax below:
Total price of product x (1 + sales tax rate) = total sales price
Total sales price – Total price of product= Sales tax
For instance, if you sell an item for $40 and the tax rate in your State is 8%. By applying the above formula, the tax will be $3.20
Here’s why,
$40 x 1.08 = $43.20
$43.20 – $40 = $3.20
Remember, rates may differ from State to State.
How Do Small Businesses Handle Sales Taxes?
Small businesses can handle sales tax in multiple ways. Business owners who are extremely busy to check their State’s requirements, reporting frequency, or dealing with the hassle of remitting payments on time can hire an Accountant to do the job. Business owners can also handle sales tax by taking advantage of the benefits available under “resale products”. And of course, softwares are available to streamline and keep tabs on each State the company conducts business.
Let’s touch base on each subject below:
Hire a Professional Accountant
Business owners can hire a professional Accountant to manage their sales tax. Having an Accountant on retainer can help ease the process as business owners can call their Accountant to acquire Nexus requirements. Your Accountant can keep track of sales tax and record the taxes in your books.
This allows visibility on the amount needed to remit payments when time is due. Your Accountant can also pay sales tax on your behalf for each State, depending on the frequency the State requires. This helps avoid any late payments and penalties. Last but not least, your Accountant will have the information needed to report and file the business’s sales tax return.
Avoid paying sales tax on certain items
Vendors who purchase products to resell can apply for a resale certificate. A resale certificate allows the business owner to buy certain products without paying sales tax on that product. The vendor then gets to charge the consumer the sales tax at the time of purchase. This way, the vendor doesn’t endure the cost.
A resale certificate also applies to vendors who purchase items that they’ll use to manufacture their products. For example, if a company buys wood from Home Depot to build a headboard for a client and sells that product to the client, it will be considered as a resale.
However, if a seller doesn’t sell the product and uses it for personal use, it must be recorded. In which then, the seller must pay taxes on it.
Feel free to contact me via email for services regarding applying for a resale certificate.
Softwares available for sales tax
Business owners who sell in multiple states can choose an automation software to collect sales tax. There are many software’s available to make business owner’s life simple. However, always have your Accountant review frequently. Taxjar is a great tool; but it’s best to research and find the best automation software for your business.
Conclusion
Sales tax can get a bit hectic. Each State’s requirements differ. However, determining your tax obligation is a start. Once you’ve determined if you have Nexus, apply for a sales tax permit in that State. Once you’re approved to collect sales tax, start charging your consumers to avoid being liable for that cost. Remit taxes to the appropriate State, before or on its due date, to avoid penalties and interests. Be sure to have your Accountant or Tax Preparer file your sales tax return even if you did not collect sales tax for that period.
Explore your options to outsource your sales tax to a professional to avoid errors. This will also give you time to focus on other tasks. If you are a reselling company, apply for a resale certificate. You’ll save money when it’s time to purchase certain products. Lastly, look into automation softwares. It can make your life much easier as you deal with multiple States.
For assistance with any services mentioned in this article, feel free to book a strategy session with me here or visit my QuickBooks Online Accountant page.
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