Sales Tax Definition

Business owners are responsible for collecting sales tax from their customers when they sell goods or services. But sales taxes vary by state, local governments, and the goods and services being sold. Here’s an overview of sales tax in the U.S.

What is sales tax?

Sales taxes are taxes the government (whether it’s state, county, city government, or another entity) levies on the consumer for goods and services. They’re usually collected at the “point of sale” (the place where the goods/services are sold) by a retailer, who then is responsible for passing on the taxes to the government.

In most cases, sales taxes are only supposed to be applied to the “end user,” the person who will ultimately consume or use the goods or services. The businesses involved in the manufacturing of goods to sell to a retailer or some other entity in the production process must often get a resale certificate from the government to show that they’re not the end user.

Sales Tax vs. Use Tax

Sales tax and use tax are closely related. A use tax is a tax on the use, storage, or consumption of a taxable product or service for which a sales tax hasn’t been paid. A business owner will usually pay sales tax or use tax on a particular purchase, but not both.

Usually, a use tax is applied in situations where someone buys something from another state. For example, if a business owner’s home state would normally apply a sales tax to a product they’re buying, but they buy it from a state that has no sales tax, the business owner’s state may apply a use tax to the item.

What is a nexus?

With so much online commerce, it’s become increasingly difficult for state governments and retailers to determine what sales taxes to charge and where. Different states take different approaches to the issue, which further complicates things.

Whether a business owes sales tax to a state government often depends on whether the business has a sales tax “nexus” there. Having a sales tax nexus used to be limited to having a physical presence in a government’s jurisdiction, such as an office or warehouse. But that’s changed.

A 2018 U.S. Supreme Court decision did away with the physical presence requirement for a sales tax nexus. Now governments can use other criteria to determine if a business has a nexus within its borders, such as making a certain amount of sales or transactions in the area.

Because the criteria for determining a nexus varies so wildly, online retailers need to do substantial research, or better yet, consult a tax professional to know what their obligations are.

Sales Tax Rates

For a business owner to meet their sales tax obligations, they must first know what rates apply to them. All but five states charge a state sales tax, but often local governments are allowed to levy their own sales tax regardless of what the state sales tax rate is.

For example, one state’s sales tax may be 4%, but the county government could add 2%, and the city could add another 1%, leaving customers with a 7% sales tax.

Other entities besides states, counties, and cities can charge sales tax. For example, special tax districts like school districts or fire districts could apply additional tax rates. Some areas have a special-purpose tax district that uses sales tax to raise funds for transportation, emergency services, crime control, and more.

If someone needs to research their local tax rates, their state’s Department of Revenue is a great place to start. It’s also important to note that a business with multiple locations may have different sales tax obligations to uphold.

How to Remit Sales Tax

The procedures for collecting and remitting sales tax (delivering sales tax funds to the government) vary from place to place. Business owners that have taxable goods and services will likely need to research their area’s requirements.

The state’s revenue office is a good place to start. There, a business owner can learn their state tax rates, whether the state requires a sales tax permit, how and when to pay state sales taxes, and more. If the state does require a sales tax license, the business owner can apply for it there. While there, the business owner can learn whether any sales are exempt from sales tax and whether any excise taxes apply.

Next, business owners would be wise to check with their local tax authorities to see if there are sales taxes at the county or city level. The business needs to know how often to submit sales tax, which can vary by region.

Failure to Remit Sales Tax

If a business owner doesn’t turn over the sales taxes they’ve collected, there can be serious penalties. Depending on the company’s location and the circumstances surrounding the failure, the business owner could face fines, criminal charges, or even jail time.

It’s prudent for business owners to stay on top of their sales tax obligations. If they get any notices about failure to remit, it’s best to respond immediately to correct the situation and keep penalties to a minimum.

Summary

Sales tax: Sales taxes are taxes state and local governments levy on the consumer for goods and services. Retailers collect sales taxes and remit them to the government. 

How ZenBusiness Can Help

ZenBusiness doesn’t handle sales taxes, but they do offer many formation services to help small businesses get started and thrive. When it comes to finances, their ZenBusiness Money Pro platform can help entrepreneurs keep track of their business finances in one place, making things much easier at tax time.