It is said that only two things in our lives are certain: death and taxes. One occurs at the end of our lives, whenever that may be; and the other is strewn throughout our lives wherever there is a flow of money. Sales and use tax is a specific type of tax that influences every purchaser from the middle-aged person buying a new Corvette to the 10-year-old buying a Coke from the local convenience store. All entrepreneurs, especially those selling goods online, need to understand the sales and use tax that they avail themselves of.
BASICS OF SALES AND USE TAX
Sales tax is a tax paid on the sale of certain goods and services within or from the state imposing the tax. Use tax is the tax to be paid to the governmental body when taxable items are used or consumed in a taxing state if the goods or services are not taxed in the jurisdiction it was obtained from. For example, if manufacturing goods are bought in Delaware (a state without sales tax) and used to create a product in Pennsylvania, the use tax would apply and need to be remitted to the Pennsylvania Department of Revenue.
A LINK BETWEEN STATES
Sales and use taxes are not a federally adopted taxes and are purely on the individual states to impose and collect these taxes. With that, a range of percentages and ways for imposing the taxes can be found throughout the United States. For example, Pennsylvania has a flat 6% sales and use tax, with a few local jurisdictions, such as Philadelphia and Alleghany County, adding an additional 1% or 2% respectively. A few other examples include: California – 7%, Maryland – 6%, New York – 4% with an additional average local sales tax of 4%, Florida – 6%, and Oregon – 0%.
On its face, a business is required to remit sales tax to the state in which it operates its business. For the traditional brick and mortar business, the state in which it operates is easy to understand. However, for those mostly online businesses, determining the business’s nexus with the state can be different. Typically, whichever state you operate in, i.e. create, sell, and/or package the goods in, would create a nexus. However, if your business has workers working remotely in a different state or utilize a fulfillment service such as Amazon that houses your products and ships them from a different state, this will apprise you of that state’s sales tax as well. Businesses can create a nexus with multiple states and therefore may be required to remit sales tax to all of those states.
RESPONSIBILITIES TO THE TAXES
The business itself, or the individual selling goods or providing services, is responsible for the sales and use tax that must be remitted to the state. This tax, as we see when we buy the new iPhone 28XRS, is often passed on to the customer during purchase and tracked by the seller for end-of-year tax purposes. For certain small businesses or individuals selling goods in low gross amounts, not passing this tax on to the customer may be a business decision as to keep the cost of your goods low, and sales tax should be calculated at the end of the year for remittance.
Failing to pay the sales and use tax required by the states can lead to required payments of certain penalties, interest accumulation, and fees. For example, in Pennsylvania, there are penalties assessed for late filing, understating the amount of sales tax required, and even the major understatement of the filing. These can account for excessive extra amounts levied against a business if the correct sales and use tax amount is not remitted to the state.
IS IT TIME TO PAY?
Businesses can be required to file their sales and use tax reports at different frequencies, depending on the type of business and goods sold, as well as the state. In Pennsylvania, a seller may be required to file monthly, quarterly, or semi-annually. There may also be discounts for filing and paying these taxes early.
There are many exemptions to the requirement to provide sales and use tax to the state. In most states, certain items, such as groceries and wearable clothing, are exempt from sales tax. Purchasers may also be exempt from sales tax, including certain manufacturers and non-profit organizations. Common resellers of goods are also usually exempt from sales tax upon the purchase, but not the sale of, the goods they sell, meaning, if your business sells goods to resellers, the sales tax does not apply to those sales. Reviewing the exemptions to the sales and use tax can save your business time and money if you or your purchasers fall into one of the multitude of exemptions many states provide.
FINAL THROUGHTS FOR ENTREPRENEURS
- Understand the need for businesses to keep track of sales and use tax needs
- Know your individual states’ requirements for sales and use tax
- Learn what states your business apprises itself of
- Understand your state’s exemptions and utilize all that may apply
- Receive legal assistance for specific sales and use tax advice
trt5096 says
Wow, what a topic of choice! I definitely enjoy blogs that take difficult information and present it in an understandable way. I really believe you did that well here. What may seem basic to us as lawyers can be an incredibly useful intro to entrepreneurs. I thought the chart you included was incredibly useful! I would love to see additional resources you found helpful in case business owners want to look further into this topic. Honestly, if you continue with the topic of taxation with this blog, things that I and those I shared with regarding taxation that were of interest was marginal taxation and the difference between cash basis and accrual basis accounting. The later is incredibly valuable for businesses to understand because it is a much better system to track the full operation! I would love to see how you would tackle that. Well written and well done!
Jen Zerfing says
Great job! You covered the topic well and I really like your use of subheadings. I was a little confused by the wording of your heading “Responsibilities to the taxes” but the information in the paragraph was good. The chart is a nice touch too.
mhl5208 says
Great topic! I really like how you explained that sales tax are a creature of state laws and municipal/local laws. As someone from NYC, I can confirm the egregiously high sales tax. I believe it’s 8.875%. I know some people go as far as going to New Jersey to buy a new iPhone.
jes6677 says
Hi Aaron!
This is an excellent post! From a design perspective, I really liked the format and structure of the post. It felt very professional and readable. I really like the pictures/graphs you used and think they really helped contribute to make the complex legal topic accessible and easily understood by all audiences. I also thought your “final takeaways” section was very well done – it leaves the reader with actionable steps moving forward. From a substantive perspective, taxation is one of the least understood things and I think your blog does a great job providing a resource to both “tax pros” and people completely unfamiliar with the topic. Great post!