Sales tax is a complex topic, but, due to the impact it can have on your business, it's important to understand.
If you’re a business owner, dealing with entity-level taxes can get complex pretty fast. The four types of taxes your business might have to pay are:
We’ll focus on Sales Tax and how it can impact your business.
Sales tax can affect pricing strategies, profit margins, and customer perception.
What’s more, failure to properly collect and remit sales tax can lead to penalties, fines, and even more serious legal issues. So, understanding sales tax regulations and requirements is important, but it’s also complicated. The good news is, with the right tools and protocols, a small business can ensure compliance, minimize risk, and hold on to its positive reputation.
Sales tax is a consumption tax imposed by state and local governments. Currently, 45 states and the District of Columbia charge state-level sales tax, and 38 states charge locality-level sales tax. Sales tax can make up 30-50% of a state’s total tax revenue, making it quite crucial.
Of course, you’ll want to know in what cases your small business is NOT required to pay sales tax. States offer sales tax exemptions for certain purchases. A sales tax exemption certificate allows tax-free purchases of goods or services that would otherwise be taxed.
The purchaser is tasked with the responsibility of getting the certificate and giving it to the seller. To complicate matters, each state has different certificates available—and you’ll need to keep all certificates on file in case you’re audited.
A common example of an exemption certificate is one for goods purchased for resale, like purchases by a retailer to a wholesale dealer, or purchases made by a manufacturer to a raw materials supplier.
States typically tax all tangible personal property (“TPP”) unless otherwise exempt—and every state has different ideas and laws about what’s exempt. Some common taxable TPPs are:
And some tax-exempt TPPs are:
Here’s where things get even more intricate. When a taxpayer and a jurisdiction have a connection, that jurisdiction can tax the taxpayer. That's what’s called sales and use tax “nexus.” In the past, a state could only tax a taxpayer if they had a physical presence in the state. But, that changed in 2018 with the Supreme Court’s decision in South Dakota v. Wayfair.
Now, states can collect sales tax from businesses that have enough of an economic presence in the state, even if they don't have a physical presence. Many states have created a minimum threshold for economic presence. Some have also created affiliate nexus laws—which state that an out-of-state business has a physical presence in a state if they have an in-state affiliated entity. Then there’s “click-through nexus.” This allows an out-of-state seller to have sales tax nexus with an in-state business that directs sales back to the seller, for example, through a link or website.
In order to file correctly and on time, businesses carry out what’s called a “nexus study”.” A nexus study analyzes your business's activities to determine whether you have enough of a connection or presence to have sales tax nexus in a particular state. The study considers various factors, such as your business' physical presence and economic activity, and then reports where you have nexus, what your potential sales tax exposures are, and what you should do to ensure compliance with sales tax regulations.
Sales tax software can help you automate tax filing, paying, and collecting.
Some of the most popular tax software options are:
Since every state charges a different sales tax rate, and it can change from product to product, choosing the right software isn’t always easy.
To reiterate, sales tax can have a strong impact on small businesses and their operations, and we know that navigating sales and use tax can be arduous and time-consuming. But, it’s essential that you understand your company’s different tax obligations so you can stay in compliance with the law and avoid fines and penalties, and that you choose the right tax software for your business’ unique needs.
If you’d like to discuss your tax concerns with the experts at Exbo Group, please reach out.