If you are a retailer it's important to know what sales taxes you need to collect, and how to correctly report them.
Most states and many local governments impose a sales tax, which is a tax that applies to retail purchases and select services. However, no matter what your state’s sales tax rate, most also have created a list of items that aren't taxed, and sales to certain buyers may also be tax-free. The term "taxable sales" refers to the total value of a company's sales that are subject to the sales tax.
What is a Sales Tax?
Sales taxes are imposed by state law, and most states also give cities, counties and other local governments the authority to impose additional sales taxes on top of the state tax. Sales taxes are paid by consumers—the people buying the taxed item—but it's typically the responsibility of the merchant to collect the money and make sure it gets to the proper tax agency. The process for paying that money to the government usually includes reporting a business's taxable sales. Each state has their own process; this table can help you get started finding out the process in your state.
Not Every Item is Taxed
For many merchants, the biggest difference between total sales and taxable sales is attributable to “exempt” items. Every state with a sales tax exempts certain categories of goods from the tax. For example, most states do not charge sales tax on food purchased to be eaten at home or prescription drugs; and clothing, textbooks and over-the-counter medications are commonly—though not always—untaxed. States vary widely in how they apply sales tax to services, such as dry cleaning or lawn care. Many states that impose sales taxes often hold a “sales tax holiday,” typically around back-to-school time when specific items are tax-free.
Other Exemptions for Resellers and Others
In general, sales tax in the United States is charged only to the "end user" of a particular item—which differs from the “Value Added Tax” (VAT) common in other countries that adds tax at every step. For example, one company might make a shirt and sell it to a distributor, who sells it to a retailer, who sells it to a customer. Under the Unites States’ system, only the final purchase—the sale to the customer—would be subject to sales taxes. Companies that buy goods for resale, or materials to be turned into finished goods for sale, can apply for a sales tax exemption certificate, which allows them to make purchases tax-free. Such purchases would not be included in the seller's taxable sales. Depending on the state, tax-exempt organizations such as charities and churches might be able to claim an exemption from sales tax. Such groups get a certificate they can use to make tax-free purchases. Retailers must collect a “sales tax exemption certificate” from an organization if they do not charge them tax.
How To Tax Out-of-State Buyers
Sales to out-of-state customers also present complications for merchants. Whether or not you should collect taxes depends on many cases whether you are a “destination” or “origin” state. If you live in an origin-based state, you must collect taxes based on where you, the seller, are located. If you live in a “destination” state, then you charge tax based on where the buyer is located.
The nuances can be tricky and laws change frequently; so it’s wise to consult with a professional to ensure you are collecting the sales tax that you should.
About the Author
Cathie Ericson is a freelance writer covering business and consumer topics. She creates branded content for Fortune 500 companies, and her work has appeared in LearnVest, Costco Magazine, Forbes, TheGlassHammer.com and IDEA Fitness. Follow her @cathieericson.
All content provided herein is for educational purposes only. It is provided “as is” and neither the author nor Office Depot, Inc. warrant the accuracy of the information provided, nor do they assume any responsibility for errors, omissions or contrary interpretation of the subject matter herein. The information should not be relied upon as replacement for professional tax advice.
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