State and Local Taxes for Business Owners: Part 4 – A Guide to Sales Tax
After covering a basic introduction to SALT, strategies for determining nexus, and nexus and tax obligations in the previous articles of our series on state and local tax for business owners, we continue with a business owner’s guide to sales tax. Like all taxes, sales tax rules can vary depending on the state. Here are a few general concepts to know.
Nexus
As discussed previously, the first step in determining whether there is a requirement to file and remit taxes in the state is whether or not nexus has been established. Since 2018, every state which imposes a sales tax has put an economic nexus threshold into place, meaning the business will be required to collect and remit sales taxes once they reach a certain amount of sales in the state. With that said, it is important to remember that physical nexus still applies even if economic nexus is not met.
Taxability
Is the product or service that is being sold something that is taxable in the state? If it is taxable, does the state impose tax on related charges such as shipping, warranties, and other fees? If the state imposes sales tax on some of these related charges but not others, what is required to be shown on the invoice to make sure the nontaxable charges are treated correctly? In certain types of work such as construction, is tax required to be paid on materials or is it charged to the end user on the final contract price? These are all important questions business owners should be asking when considering taxability.
Exemptions
If the product or service is taxable, could an exemption apply so that tax is not required to be collected? There are various types of exemptions, such as manufacturing, resale, or sales to nonprofit entities. Typically, this requires collecting an exemption certificate from the customer to prove the sale is exempt.
- It is important to understand the state’s rules for proper documentation and retention of exemption certificates.
- Another consideration is whether the business is required to count exempt sales when calculating whether they have met the economic nexus threshold.
Tax Rates
Many states have both a state level and various types of local taxes, so sales into different areas of a state require the calculation of multiple rates. A business owner must consider the most efficient and cost-effective way to calculate sales taxes when rates can change frequently.
Unlike most other types of taxes, sales taxes are generally imposed on the purchaser rather than the seller. One of the downsides of sales tax is that if handled improperly it can result in a business paying for a liability that would have otherwise been paid by its customer. This is why it is crucial that business owners monitor and minimize this risk.
Keep an eye out for our next article in this SALT series and learn more about our services by visiting our Tax service page. For assistance or questions, please reach out to our seasoned and experienced tax professionals who can help your organization navigate the complexities of state and local tax.
