Often as not, people opening the most successful small businesses are great at what they do, but the financial end of their enterprises can often elude them. If that describes you – if your talent, creativity, and ideas are so great, launching a small business was too compelling to resist – knowing as much as you can about the topics of sales tax, sales tax calculation, and small business sales tax matters will not only make you feel confident but empowered, as well.
VAT tax 101 — and aren’t you glad you don’t have to pay it?
Don’t mistake sales tax for VAT taxes or you’ll get off on the wrong foot. Value-added taxes (VAT) are added at the time a product or service originated and at intervals before it’s ready for the market, not at the time the shopper pays for the service or product.
In fact, you should be delighted that you don’t have to worry about VAT! While more than 160 nations around the globe impose this type of tax as its major primary consumption revenue producer, you can focus on making a profit rather than having to add more financial tasks to your busy schedule.
Okay – so what is a sales tax?
Also classified as a consumption tax, sales taxes are attached to goods and services at the point of sale. Best explained as taxing consumers when they spend money, this may seem like a responsibility you would rather not face, but keep in mind the fact that as a business owner, you’re the beneficiary of this largesse.
Classified within the indirect tax category, when your patrons and customers make purchases, sales tax revenues don’t go directly to government coffers but rather state and local coffers, so every dollar spent at your business stays out of Washington D.C. and ultimately benefits your state’s services and programs.
Small Business Sales Tax 101
It doesn’t take long from the moment you open your doors for business to master the art of handling sales taxes — even if the principles of math eluded you when you were in school. The process is relatively simplistic. At the time a purchase is made at your establishment, a percentage of the retail cost of that item or service is collected.
Your job is to keep an accurate accounting of these revenues and remit those funds to your state in accordance with the tax schedule(s) published and distributed by your state government. The process also applies to local taxes your municipal government collects.
Does every small business owner have to collect sales taxes?
That depends upon where your enterprise is located, because while some states mandate state sales taxes, others may impose both state and municipal sales taxes on every sale you make.
There are five states in the U.S. that don’t levy sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Local governments in 38 states have enacted sales tax laws, so shoppers may be charged local and state taxes. Happily, these two are bundled so as a business owner, you don’t have to calculate two different rates.
Are sales taxes levied on everything?
Here’s the good news: Not everything you sell is subject to sales taxes. You’ll want to familiarize yourself with your state’s tax codes because you may do business in a state or city that exempts prescription drugs and groceries. In some areas, clothing and medical devices are exempt from sales taxes as well.
Further, as a business owner in your home state, you could be notified of select sales tax holidays regularly declared in some states. What items most often fall into the sales holiday category? Necessities parents shop for in preparation for the new school year, so if you’re in the business of selling school supplies and similar goods, you’ll make shoppers very happy when they’re out and about spending money on these goods.
Must entrepreneurs running small cyber businesses collect state or local sales taxes?
The answer is yes and no. Familiarize yourself with the word nexus to get a clearer view of your tax collection obligation. Until 2018, nexus — defined as the amount of presence a business has in a specific location — determined whether business owners had to collect state and/or local tax.
That year, a U.S. Supreme Court ruling that involved the home goods website Wayfair changed the rules. These days, if your enterprise does business outside your home state, you must collect sales taxes both in your home state and the shopper’s state.
To make an already-complicated situation more complex, this doesn’t simply happen by magic. Your state legislature must enact laws requiring sales tax collection elsewhere. If no such legalities have been undertaken in your location, you don’t have to collect sales tax on any location in which you have no physical presence.
Why is it imposed in the first place?
According to the nonprofit Tax Policy Center (TPC), state governments would have serious funding issues if were they not able to collect sales taxes. In 2017 alone, $457 billion was generated. Around $300 billion of that amount came from general sales taxes. The remaining amount came from motor fuel, alcohol, and tobacco sales.
Local governments also benefitted to the tune of $124 billion that year. Are alcohol, gas, and tobacco the only categories generating extra tax revenues for municipal and state governments? In fact, the list is growing. More products are being relegated to what’s called a “sin tax” designation, says TPC Senior Researcher Lucy Dadayan.
Additionally, more states are adding gambling and marijuana sales to the list of what Dadayan calls “budget saviors” because these “vices” are providing large amounts of revenue to state coffers. If your small business belongs to any of these categories, you’re going to want to keep tabs on state legislators and the bills they are considering so you remain cognizant of new sales taxes as they are discussed, voted down, or passed.
Do what you do best and leave the numbers to professionals.
It can be expensive to hire a local accountant to manage the finances of your small business — especially if you’re just getting started. It’s highly recommended to outsource this job to an online accounting agency. One of the reliable agencies in Florida that you can turn to is Swiftbooks, LLC.
At SwiftBooks Accounting, you choose the package that fulfills your needs, and a modest monthly fee covers this assistance. Whether all you need are regular tax reviews, account management help, oversight by a personal accountant, deadline reminders, or every one of these services, you choose the package that best suits your needs, knowing that no hidden fees will pop out of the woodwork when you can least afford them.
Call 786-204-2881 for a consultation or to turbocharge your business with a FREE trial.