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Sales Tax Basics for the Bewildered   

Sales Tax: The Business Enigma

As if you don’t already know, collecting, calculating, reporting and paying sales tax is one of the most confusing and annoying aspects of running a small business. All but 5 states and thousands of localities impose sales tax, with each taxing authority having its own laws, tax rates, timetables and exemptions. Add to that the ever-increasing popularity of online commerce and the waters become further muddied. If you haven’t yet hired an expert tax accountant, good luck keeping up.

Who Taxes Whom?

Sales tax is a point-of-purchase levy that is paid by the end user of certain goods and services within the borders of a taxing authority. Small business owners are required to collect  and remit sales tax to the appropriate authorities on a timely basis.  A consumer is legally responsible to pay sales tax on purchases and will be liable for use tax if sales tax is not imposed at the point-of-sale.

There are a multitude of transactions that are subject to taxation…from cash sales to trade-ins or property exchanges. The amount of tax is determined by applying the applicable tax rate to the total sales price.

In order to collect sales tax, most states require you to register as a sales tax vendor to obtain a Certificate of Authority to be displayed at your place of business. Taxing authorities generally require sales tax vendors to remit the sales tax they collect and to file a sales tax return on a monthly or quarterly basis.

The Big Question: Is Your Business Exempt?

Each state has its own set of exemptions from sales tax. It is the responsibility of the purchaser to show that it is exempt from tax, by presenting a valid, written certificate that documents the purchaser’s permission to waive payment (an exemption certificate), or, in the case of a wholesaler, a resale certificate. Most exemptions are based on the property’s character such as type (i.e. food, medicine), use (i.e. wholesale, raw materials), industry (agriculture, manufacturing, pollution control) or type of buyer (governments, nonprofit).

What about Online Commerce?

To combat the problem of lost sales tax revenue that results from online out-of-state customers, many states have passed laws that require larger internet retailers with no nexus (a physical presence within the state where they’re doing business) to, nevertheless, collect and remit their state sales tax based on the physical location of their customers (remote sales).

What About Small Businesses That Sell Online?

The Federal government has gotten into the action.  There is currently  a new bill in Congress – the Marketplace Fairness Act –  that would require sales tax collection on remote sales shipped to member states (New York and Connecticut are not members; New Jersey is), regardless of nexus.

The current debate in Congress centers on the level of annual remote sales that would qualify a retailer for a Small Seller Exemption. The current bill, which has not yet become law, would exempt online retailers with less than $1MM of remote sales from collecting and remitting sales tax on remote sales (another level under consideration is the SBA’s definition of a small business – a very lenient $30MM).

 

To find out more about sales tax and how it applies to your personal and business accounts, please contact Victor C. Belgiorno at 516-861-3704 or .

 

 
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