Top 10 Things Every Business Needs to Know About Sales Tax

Business owners face a myriad of regulatory checklists when setting up a new venture. Before the first customer walks through the door, the new owner has already tackled seller’s permits, licensing, zoning, and registration, among other hurdles. Even after these boxes have been meticulously checked, businesses selling tangible personal property, and even some providing services, have another major consideration – sales tax.

Depending on your business model, the idea of staying compliant with sales tax regulations can be overwhelming; however, if you get your shop set up properly, compliance is relatively simple.

The following are answers to the most common questions business owners have about sales tax.

1. What is sales tax?

Generally, sales tax is a tax imposed on the retail sale of goods and some services based on a percentage of the gross receipts.

2. Do I have to collect sales tax on all of my sales?

Not necessarily. You only collect sales tax when you make a sale to a customer who resides in a state in which you have a physical presence. For example, if your business is located in California, you would need to collect sales tax from your California customers only.

Deliveries made to a state in which you do not have a physical location are generally not subject to state sales tax provided the purchased product is shipped directly to the purchaser’s out-of-state location and is to be used outside the state. In this case, neither the purchaser nor its agent may pick up the purchased property within the state.

3. What rate do I charge my customers?

The rate is determined by the state or other governing municipality.

California’s sales tax, for example, varies depending on the district – ranging from as little as 7.5% (the statewide minimum) to as much as 10% in the Los Angeles County suburbs of La Mirada and Pico Rivera.

4. Am I supposed to charge a rate based on where the customer is located?

When determining the rate to charge, you must first learn whether you are operating in an origin- or destination-based state. California is a hybrid, modified-origin-based state where state, county, and city taxes are based on the origin of the sale, while district taxes are based on the destination of the sale. California gives you two options in applying this, both are considered to be acceptable.

  1. The first option is to charge the state rate plus your district rate on sales shipped within your district. For sales shipped outside your district, collect the state rate only. If you choose this option, the customer is technically liable to remit the omitted district tax to the state.
  2. The second option is to charge state plus district rate for every single sale shipped to a customer in California. This ensures that the local district tax always gets collected.

It is worth noting that collecting the same sales tax rate from every customer in California is technically wrong. If you do this you are most likely not collecting the correct rate on every sale.

5. If the customer does not pay the sales tax, do I still have a liability?

Yes. Sales tax is imposed upon the seller, not the purchaser. The law allows that the retailer may be reimbursed by charging the sales tax to their customer. However, as a retailer, even if the customer does not give an amount in excess of the retail price of the product as “sales tax” for the purchase, you are still liable for remitting the full amount of the tax.

6. If the tax I withhold is higher than the tax owed, what do I do with the difference?

Technically, if you collect more than the amount of tax due, you must either return the excess amount to the customer or pay it to the state.

7. What if the customer does not ultimately pay for the product provided?

Sales tax is imposed on completed sales, not collections. Even if the customer account becomes uncollectible, the retailer is still responsible for tax on that sale. This is important to keep in mind when preparing sales tax returns. Even if an account is not yet collected, gross receipts from the sale must be included in the tax base for sales tax purposes.

8. Are any sales exempt from sales tax?

Yes. Some common examples of exemptions and deductions include:

  • Sales for Resale (if supported by resale certificate or purchase order)
  • Some Food Products (for example, cold food sold to-go)
  • Labor (Repair and installation)
  • Sales of prescription medication
  • Sales to the U.S. Government

9. When are my taxes due?

Businesses are assigned a filing frequency based on the total sales tax collected. Your business may need to file monthly, quarterly, or yearly.

10. Is a sales tax return required even if my liability for the period is zero?

Yes. Every business with a sales tax license is required to file a return even though no sales were made during the period covered by the return; however, if you have seasonal sales or your sales tax liability has declined, you may request less frequent filing from the state.

The Bottom Line

Sales tax is an important source of revenue for the state and you should strive for full compliance in this area to avoid costly penalties and fees that result from a sales tax audit. By setting up your business early with a system that ensures correct collection and remittance of sales tax, you can avoid unnecessary expenses and fees in the future.

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