How to collect, calculate, report, and remit sales tax continues to be one of the most frequently asked questions among small business owners. Forty-Five states (excluding Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon) require businesses to pay sales tax in order to fund budget items like schools, roads, and local government buildings. Each taxing authority has its own laws, tax rates, due dates, and exemptions making it confusing for small business owners that offer services and products, sell multiple product lines, or sell across multiple states. Sales tax is a transaction-based tax that is imposed by states and thousands of localities on the sale of a product or services depending on the tax jurisdiction. In general, sellers are responsible for collecting sales tax on all taxable sales.
Steps in calculating, collection and remittance of sales tax
Step #1: Determine if your product or service is exempt from sales tax
Laws can vary from state to state on what products and/or services are exempt from sales tax so it’s important that you look into whether or not these exemptions apply to your product or service. For example, services provided in Virginia are not taxable to the customer unless the services are indistinguishable from the product provided with the services.
There is a couple of universal exemptions that are based upon the type of item being sold and what it will be used for.
- Type of item: There are product-specific exemptions on items that individuals require for life: food, medicine, and medical devices to name a few. States may tax these items at a lower tax rate or consider them exempt from sales taxes.
- Use of item: Wholesale items that are sold to a company to be resold generally aren’t subject to sales tax as are raw materials that are just an ingredient of the final product. Additionally, products that are provided to support certain industries – including manufacturing, industrial processing, and agriculture – are also exempt from sales tax. However if your company is selling a manufactured item to an end user (not a reseller), then your company is required to assess and charge the sales tax to the end user and subsequently remit to the taxing jurisdiction.
- Type of customer or end user: States do not allow businesses to tax sales that are made to the federal government or related agencies. Nonprofits, charities, religious and educational organizations are also exempt from sales tax.
If you sell a product or service that does not fall under one of these exemptions, you most likely have to pay sales tax to the state where your business has a “sales tax nexus”.
Step #2: Apply for a sales tax permit
Before you can begin collecting sales tax, you have to register for a sales tax permit in every state where you have a sales tax nexus. A sales tax Nexus is essentially a way to connect the seller to a particular state. Generally, this can be done for free on the state’s department of revenue website. Upon completion, you will receive a sales tax ID that you will use when you are reporting your sales tax.
Step #3: Calculating the sales tax
The sales tax rate that you will apply to your sales is predetermined by the state; you will, however, need to research that rate for every state that you sell in.
Step #4: Collect the sales tax
When invoicing your customer, the sales tax must be displayed separately from the purchase price of the item(s) on the invoice or receipt given to the customer. If you are providing services and products, the invoice should separate the service portion from the product being sold. The sales tax rate should be indicated on the invoice.
Step #5: Prepare the sales tax form and remittance of the sales tax
We’ve come to the last step which is to prepare, submit your sales tax return and remit the payment you’ve collected from your customers to the state. The due dates for filing taxes vary from state to state. The frequency of the reporting period also depends on the state: some have monthly due dates while others operate on a quarterly, semi-annual, or annual time frame.
Please contact us if you need additional guidance in this area at Jones CPA Group.
STATEMENT OF CONFIDENTIALITY:
The information contained in this electronic message (and attachments, if any) is confidential under applicable law, and is intended only for the use of the individual or entity named above. If you are not the intended recipient, you are hereby notified that any use, distribution, copying or disclosure of this communication is strictly prohibited. If you have received this communication in error, please notify Nellie M. Green, CPA, CVA immediately at Jones CPA Group, P.C. (757) 631-4760 or by return e-mail to nell@jonescpagroup.com and permanently purge the communication immediately (and attachments, if any) without making any copy or distribution.
DISCLOSURE: Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed by law.
