We want to give you a better experience, where you feel connected to your financial journey and confident that you’re making the best decisions for your business. As part of this, we’ll feature blog posts on frequently asked questions. No question is a dumb question, so if you want to learn more about something, just ASK.
You started your business with a dream. Now you’ve created a product people love and they want to buy it. As you get ready to sell, the first thing on your mind is sales tax right?
Don’t worry, we’re here to help. While it might not be as sexy as creating or selling your product, sales tax is important … and it can cost you dearly if you don’t pay attention to it.
First a few definitions …
NEXUS = a responsibility to collect tax
Typically, nexus in a state occurs if you:
- Own or rent property in the state
- Have employees including salespeople or independent contractors in the state
- Employees make deliveries
- File an income tax return in the state
A tax imposed by your friends at the government on the sale of goods and services. Sales tax is typically levied (collected) at the point of sale (when you purchase the product or service). The sales tax is collected by the business and then passed on to the government. A business must charge sales tax if it has nexus in that particular area (hence why we explained nexus first).
To correct the price advantage out of state retailers have over retailers who have to collect sales tax, there’s a little thing called use tax. This is also a tax imposed by your friends at the government and is assessed at the same rate as sales tax. So how are they different? Well use tax is applied not when a product or service is sold, but after the sale. In other words, tax was not paid on the initial purchase, so instead it is paid to “use” the product.
Some customers may claim to be treated as exempt (off the hook) from paying taxes. However, you should never take them at their word. Rather, always treat them as taxable until you are provided an exemption certificate.
As a rule of thumb, update your exemption certificates every three years.
We now further convolute this by saying that there are different types of exempt organizations (see this list) and not every item is subject to tax as there are different tax rules in every state. So (you guessed it) it’s best to work with your accountant when it comes to exempt organizations and items, as well as sales tax in general.
So how do you know when sales and use taxes are applied and when they’re not?
The answer is a little less than simple. But here’s the basic gist:
You should consider all sales subject to tax unless:
- You do not have a responsibility to collect tax (cough nexus cough) in the state of delivery
- Purchaser presents a valid exemption certificate.
- Item is exempt from tax at point of delivery.
Use tax applies to all taxable purchases including:
- Office equipment and supplies
- Office furniture
Do you really need to be concerned?
Sales and use tax rules are constantly evolving and growing more complicated. This lovely complexity makes it vital for companies of all sizes to understand their environments so they’re in compliance with tax obligations.
Here’s just one example. Certain activities, such as selling a product over the Internet, or advertising through an online marketing company, can inadvertently establish nexus in a state, making you subject to that state’s tax laws. What does that mean for you? Well, if you have unknowingly established nexus, you can face responsibility for back sales tax, as well as super fun things like penalties and interest.
So yeah, you should probably pay attention to sales and use tax. The best way is to work with a trusted accountant who can help you see where you’ve established nexus, where you might potentially have issues, and help you track your tax obligations.