While visiting a local furniture store, you spot a $500 desk that's just perfect for your home office. You whip out your checkbook, write a check for exactly $500, and the desk is yours. Or is it? As you're probably already aware from your everyday shopping experiences, you can't always purchase an item priced at $500 by paying just $500. Rather, in most states you're likely to pay anywhere from $520 to $550, with the added amount representing state and local sales taxes.
But what exactly is a "sales" tax? And how, if at all, does your being a small business owner affect the way you deal with such taxes?
- Identifying a sales tax- among the states, there are actually several different types of sales tax systems. The biggest difference is whether the seller or the purchaser is the main taxpayer. In some states, the tax is imposed on sellers, who then have the option of passing the tax along to their purchasers. In other states, the tax is imposed on the purchaser, with the seller being responsible for collecting the tax and remitting it to the state. And then there are other states where the liability for the tax is shared by sellers and purchasers.
- Taxable event- the triggering event for imposing the tax is the consummation of a retail sale. Initially, the states were content to limit their taxes to retail sales of tangible personal property. However, in recent years most states have expanded the scope of their sales taxes to encompass leasing transactions and at least some services.
- Common exemptions- each retail sale is presumed to be taxable. Unless a recognized exemption applies and, in most cases, the purchaser affirmatively establishes his or her right to claim the exemption, the sales tax must be paid.
- Computing the tax- sales taxes are computed on some measure of gross receipts. In other words, the tax generally applies to the full amount a seller receives from a purchaser as opposed to the net profit the seller realizes on the sale.
- Use taxes- a state's sales tax applies only to retail sales that are consummated within the state. This creates a big loophole from a taxing state's perspective in that purchasers can avoid the state's sales tax by making their purchases in other states. To close this loophole, each state having a sales tax also has a complementary "use" tax that applies to the storage or other use of tangible personal property or taxable services in the state.