A lot of new business owners are not aware of their responsibility to collect and pay sales taxes to those states where they may have nexus. If you have a sale or fulfill a sale in a state in which you have business presence, it is possible that you will owe sales taxes to that particular state.
Sales taxes are imposed on the price of goods and/or services and are an important source of raising capital for state governments. Sales taxes in the United States are calculated as a percentage of the sales price and are collected by the state and local governments. Each state and city has its own tax rates and not all goods and/or services are taxed the same way. In general, most states do not impose taxes on services and on necessities. However, food bought in restaurants is an exception and is normally taxed. Certain states also allow exemption from sales tax for certain organizations such as schools and certain non-profit organizations. These organizations may apply for sales tax exemption thru a process similar to that of a vendor applying for a sales tax permit.
The responsibility for collecting the sales tax lies on the sellers and they are required to report the sales taxes collected to the state. Resellers are not subject to the sales tax if they purchase the goods with the intention of reselling them. Your local convenience store that charges you sales tax is really acting as a middle-man saddled with the task of collecting and delivering the sales taxes to the government. The privilege to be exempt from sales tax on items that are bought and intended for resale is obtained by applying for a sales tax permit/license. This certifies a person or business as a reseller eligible for exemption from paying sales taxes on items bought for resale and requires them to withhold sales taxes from their buyers.
Businesses owners who have physical stores would withhold sales tax from all their customers unless presented with a reseller’s permit. Online sales are slightly different. There is a lack of uniform regulation and enforcement for “online stores”. To keep things simple, sales tax is normally expected to be collected when customers are from the same state as the business’ state of incorporation and where the operations and business assets are located. Sellers are not required to withhold sales tax for the state the drop shippers are located in since they do not own the drop shipping company’s operations or assets. Therefore, they are not considered to have physical presence in the state of the drop shipper. Online stores and sales tax collection laws are not fully formed yet since this matter is fairly new. However, the states are now in the process of establishing a uniform sales tax collection and monitoring system for the internet.
In conclusion, the sales tax is a consumption tax charged at the point of purchase for certain goods and services. The end-user or the person who purchased the good for his own consumption generally carries the economic burden of paying the tax. Business owners are tasked with the responsibility of collecting and remitting these taxes to the government and will be levied with penalties and interest if they do not comply. Since sales tax is a huge and important revenue source for state governments, compliance is strictly enforced and numerous audits are conducted to ensure that the tax is collected and remitted to the government.
The Tax Club is committed to educating the public to the best of its abilities. If you would like to speak with one of our associates for a free consultation, please contact us at 866-840-1829 x5438
