As a business owner, you are used to facing never-ending checklists to help get your new ventures up and running. 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 primary 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 correctly, compliance is relatively simple.
The following are answers to the most common questions business owners have about sales tax.
1. What is sales tax?
Typically, sales tax is an amount of money that is calculated as a percentage and added to the cost of a product or service. Retail sales receive tax, and 45 of the 50 United States enforce this rule.
2. Do I have to collect sales tax on all of my sales?
Not necessarily. If you make a sale to a customer to resides in the same state as your business, you collect sales tax. If the customer purchases from outside the state, you do not collect sales tax. For example, if your California business makes sales to California residents, you would need to collect sales tax.
Deliveries made to a state in which you do not have a physical location are generally not subject to state sales tax. However, the purchased product must be shipped directly to the purchaser’s out-of-state location and must be intended to be used outside the state. In this case, neither the purchaser nor its agent may pick up the purchased property within the state.
Read more: Top 10 IRS Tax Issues
3. What rate do I charge my customers?
The state or other governing municipality determines the rate.
For example, California’s sales tax varies depending on the district. It can range from as little as 7.25% (the statewide minimum) to as much as 10.5% in the Los Angeles County suburb of Santa Fe Springs.
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 taxes of the state, county, and city are based on the source of the sale, while district taxes are based on the destination of the sale. California gives you two options in applying this; both are acceptable.
- 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.
- The second option is to charge the state plus the district rate for every single sale shipped to a customer in California. This process 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. The seller is responsible for the sales tax, not the purchaser. The law allows that the retailer may be reimbursed by charging the sales tax to their customer. However, even if the customer does not give an extra amount of money intended as “sales tax,” 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. Keep this in mind when preparing sales tax returns. 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.
Read more: How To Reduce Your Tax Liability
This Is The Bottom Line
Sales tax is an essential 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. Contact us if you need help.