Sales Tax

Sales tax, the oh so daunting, confusing, and frustrating topic that no small business owner wants to talk about… But ignoring it is not the thing to do! If you are questioning whether you are required to pay sales tax, and what the heck it even is – read on.  

Understanding Sales Tax:

Sales tax is a consumption tax imposed by state and local government on goods and in some cases, services. It’s typically added to the price of taxable goods and collected by the seller at the point of sale. Meaning, as a business owner you are the middleman – simply passing it from the customer to the government. The tricky part is, states have their own laws when it comes to sales tax, and only some require it be collected on services.

Service-Based Businesses and Sales Tax:

In order to determine if you owe sales tax, ask yourself the following questions:

1. What state is my business registered in? Even if you travel for work, or selling your services in every state, sales tax begins at the location your business is registered in with the IRS.

2. Does this state require sales tax on services and digital goods? Sales tax law varies significantly from state to state. For example, in Washington state you must collect sales tax on digital goods, but in California you do not.

3. What other states do I conduct business in? If you are selling your services/digital goods to states other than where your business is registered in, you need to consider two things: 1. Does this state require sales tax on digital goods and services and, 2. Are you meeting the economic threshold and or number of transactions per year to trigger sales tax – also known as nexus.

Sales Tax Compliance:

You figured out your service-based business is liable for collecting sales tax, now what?

1. Registration: You’ll typically need to register with the appropriate state and local governments. This process involves obtaining a sales tax permit or license, which grants you the authority to collect sales tax from customers.

2. Tax Collection: Once registered, you’ll need to collect the applicable sales tax from your customers at the time of sale. This typically involves adding the appropriate sales tax rate to your invoice or bill. And remember – different cities have different tax rates.

3. Filing and Remittance: You’ll be required to file sales tax returns on a quarterly basis and remit the taxes collected. This means it’s crucial to stay organized and keep accurate records of your sales and tax collections!

Exemptions and Deductions:

Service-based businesses may qualify for certain exemptions or deductions under state sale tax laws. It’s important to research and understand if you qualify for this in each state you conduct business.

Conclusion:

You are a sales tax expert now, right?! Just kidding…the question of whether your small business needs to pay sales tax is not a simple yes or no. There are many different factors to consider, and you did not open your own business to become a pro sales tax guru. That’s why you need to hand it over to the professionals to figure it out for you.  Lucky for you, BP Bookkeeping offers sales tax services to its customers. Fill out my client interest form for more information!