If you’re a new small business owner, you’ve probably had a moment where you scratched your head and wondered, “How do I figure sales tax?” Maybe, you’re even doing that right now. Before you learn the correct
method, it might be helpful to know a few more things about this special tax that varies so much from one location to the next.
Although more people grumble about their income taxes than the sales taxes, the latter has been around for much longer than the former. Throughout history, various types of excise taxes have been imposed on the sale of goods. To illustrate the historical relevance of sales taxes, paintings in Ancient Egyptian tombs represent tax collectors receiving funds on the sale of cooking oil and other individual commodities.
As Rome conquered the world, they spread the general sales tax idea throughout Europe. The modern US sales tax structure was first implemented during the Depression Era. Currently, only Alaska, New Hampshire, Delaware, Oregon, and Montana do not have a general sales tax.
When Do Sales Taxes Apply?
Sales taxes apply when you sell merchandise to the final consumer. In most states, there is no sales tax on services like labor to repair your car or medical care. If you sell items to another business for resale, no sales tax is imposed because they are not the final customer who uses the product.
Businesses are responsible for calculating, charging, collecting, and submitting the sales tax when the final sale occurs. Sometimes, even the final sale doesn’t result in sales tax. Some professions,
like watermen, aren’t required to pay sales taxes on anything used for their chosen career. To date, online merchants aren’t required to charge sales tax unless they also operate a brick and mortar store in the same state in which the customer who just bought their product lives.
In other words, if you operate an online knitting store in Texas and sell a bundle of yarn to a customer in Rhode Island, you wanted charge sales
tax because your business doesn’t have a physical location in Rhode Island – where the customer lives.
Fierce congressional debates continue regarding sales tax and the internet. Many elected government officials would like to expand the breadth of sales tax on products purchased online. Because internet sales tax laws can change, please sit down with your accountant to understand current changes, if they exist.
How Do I Figure Sales Tax?
Most modern cash registers are programmed to automatically calculate sales taxes as purchases are entered. For online ordering systems, the same is true. It becomes complicated because each state, and sometimes each locality, can determine their own sales tax rate.
To make it even more complex, it often varies by the type of goods sold. For example, in some areas, grocery items incur a lower sales tax than prepared food. Prescriptions are usually tax free, but over-the-counter medications can be tax free, taxed at a lower rate, or taxed at the same rate as other retail items depending on your location.
Some products, like cars, boats, and expensive jewelry, are considered luxury items in some areas and can have a completely different sales tax rate. Your best strategy for answering the question, “How Do I Figure Sales Tax?” is to reach out to the taxation department for your state and locality to get a list of the regulations for your area. Of course, as your operation spreads into different counties and states, your job becomes even more difficult. A good accountant can help you navigate the sales tax maze.
Do I Need a License to Charge or Collect Sales Tax?
In most states, every business that sells taxable items to the final customer is required to obtain a sales tax license. This license is easy to obtain. The main purpose of the license is to help the state track each business to ensure that the quarterly sales tax returns and payments are completed properly. Remember, just like each state decides on their own sales tax structure, each state sets their own rules for licensing and reporting requirements. Please contact your state’s taxation department for more information.
How Do I Submit My Sales Tax Collections?
Again, each state will vary, and you should get the detailed requirements directly from your state taxation department. However, most follow some general guidelines. They usually expect each business to keep detailed records of each sale and the total amount of sales tax due.
On a quarterly basis (every three months) each business must fill out a sales tax return to report their total sales for the quarter and pay the sales tax based on that amount. Because this money has already been received be the
merchant (you), there are stiff penalties for any retailer who doesn’t follow the rules and submit their sales tax payments on time.
In addition to civil penalties, you can even go to jail for not paying. If you have any questions about your accounting methods or the rules in your
area, contact your accountant for assistance.
Additional Sales Tax Resources
Because you probably still don’t have a detailed answer to, “How do I figure sales tax?” the following list provides additional resources to help:
- List of state
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sales tax rates
- Zip code lookup of sales tax jurisdictions
- National Retail Sales Tax Alliance
- Grade school example of calculating sales tax
- Sales tax calculator
- Tax Data Systems