Definition of Sales Tax
The sales tax is applied at the point of sale of qualifying goods. The sales tax is imposed by the government and by the local county. It is collected by the vendor and then paid to the Department of Revenue. The sales tax is charged to the final customer. A product may pass hands via many distributors and suppliers, but a sales tax is paid only once.
If business A buys goods, services, or other items strictly for business use and then it resells those goods and services to other manufacturers, let’s say business B, then business A does not pay sales tax. To qualify as tax-exempt, business A needs to obtain a resale certificate. This is a document that proves that business A intends to resell the purchased goods and services to other businesses.
Since each jurisdiction charges its own sales taxes rate, then it is strictly important to clearly define where a business is located so it can charge the applicable local sales tax. In legal terms, the presence of a business is defined as its Nexus. A nexus doesn’t solely depend on a business’s headquarters. Even having one employee in a foreign region, can qualify the business for a nexus in that foreign region. Therefore, has been particularly difficult to pinpoint the nexus of eCommerce companies, as they have remote employees in various countries.
There are 2 special types of sales tax: excise tax and use tax. This excise tax is applied to some special goods and services sold, such as alcohol, tobacco, gasoline, and food. These items might be charged above or below the average sales tax applicable for a particular region.
The use tax is charged when a consumer buys large quantities of a product in another jurisdiction from their local one. This is the case when a consumer buys a car in a state that is not their home residence. These types of taxes are harder to enforce and only are applied to large value purchases.
It is important to point out that in the USA there doesn’t exist a federal tax rate, but each state, county, and city charge their own sales taxes. The idea is that the same product can have different tax rates depending on where it is sold. In other countries, they apply a government flat tax called the VAT(value-added tax). This tax is paid every time that there is a sale and a purchase, so that means that there are no sales exemptions in the form of resale certificates.
In the USA taxing system, even though not every sale is taxable, the result is that the taxpayers will pay more in taxes compared to other countries, as there are taxes on every legal jurisdiction( on the state level and local county level). This discretionary difference with the VAT system comes from the fact that under the VAT system, each sale is taxable, and thus the burden does not only fall on to the consumers but is split among the consumers and the businesses. The higher taxes that USA consumers pay it is due to the fiscal and bureaucratic laws.
How to Pay Sales Tax
As a business owner, you will collect the sales taxes from the retail sales. These collected sales will then be paid out to the Department of Revenue during the times of the quarterly business reporting. As a retailer, it is your sole responsibility to collect these taxes, as any problems that can arise with the wrong calculation of the tax sales will incur further liabilities that will hurt your income.
Location of sales taxes
As a business owner, you need to be very mindful of the jurisdiction that your business operates and all other jurisdictions that might qualify as a business nexus. In the USA, there is no conventional sales tax rate. Thus, this means that depending on your location, you will charge different tax rates. The sales tax itself is made up of state tax, county tax, city tax, and in some instances the special tax. There are online tools that you can use to research the tax rate applicable to each jurisdiction.
The above taxes averagely add up to a total sales tax that is usually from 6 to 10 percent. The states of Oregon, New Hampshire, and Delaware do not charge sales taxes. Some other states do not charge state tax and some others do not charge local taxes.
Sales Tax Calculators
You can get a detailed list of all the applicable sales tax for each jurisdiction by using various online resources, such as tax calculators. These tools are free to use and you as a business owner will benefit greatly from such resources. All that you must do is input your zip code and the purchase price. The calculator will show the total amount of sales taxes and it will break it down into all its components, so you know exactly what the taxable rate is and how much is the total taxable amount. This way you know how much sales tax to collect from your sales.
Other types of sales tax
In addition to the above categories of sales tax, there are other types of sales taxes that apply to specific businesses or industries. We will list them here, so you as a business owner can get all the information needed to charge the right taxes for your business.
- We will start with the manufacturing sales tax. This is applied to all sales of personal property of manufacturers. This sale also applies to producers.
- Then we have wholesale sales taxes. This applies to all sales of wholesales a This tax is applied when the goods are sold in the form of packaged and labeled for delivery to the end-users.
- Then we have a retail sales tax, which applies to the final consumers of retail goods. In the category of final consumers sometimes we also have businesses. This means that if a business does not intend to resell the retail goods, it does not qualify for a resale certificate, thus it incurs the burden to be charged the retail tax on the products purchased.
- Proceeding we have the gross receipt sales tax. This is a controversial tax as it applies to all sales that a business incurs. This tax adds double taxation on goods as it charges taxes twice on the same product. First, we have the consumer sales tax on a product, then there are the gross receipts sales also charged on top of sales tax. This has spurred some controversy among lawmakers. As of right now, this tax is still in place, and you will need to take the right steps to be compliant with this tax.
- Securities tax is charged on all transactions related to stocks and other forms of financial instruments.
- Fair tax is a new idea from the federal government. The concept is to replace the income tax and to be used in a more applicable way to the needs of the current USA economy. This type of tax is still under discussion.
- Turnover tax is applicable to capital goods . This is paid by the business on a product before that product reaches the end-user, which is the consumer.
- We explained above what excise taxes are, but there is one detail that we did not point out. This tax is charged to the seller, not to the buyer. This means that this tax is paid by the business that sells qualifying goods for excise tax, and not the consumer that buys these qualifying goods. Of course, that the business will increase the price of sale of these products to make up for the difference, so indirectly the consumer pays these taxes in the form of a higher product price.
- VAT as we explained is charged on all sales and it is not used in the USA. However, if you have suppliers from outside of the USA, your business will be involved with VAT. The way that this tax works is that it charges the difference between the prices paid by the first seller and the second reseller. Thus, only fractions of the price are taxed at each level or reselling and not the whole amount.
- On the same category as VAT, we have the GST (goods and services tax). This tax applies to specific goods and services. This tax applies to these countries: Singapore, Malaysia, Canada, India, Greece, and Spain.
- To conclude with the types of taxes, we already explained use tax, which is a type of tax paid when a consumer buys a product in a different state than their current residence.
When it is time to file taxes, taxpayers can choose the standard deduction or the standard deduction. The idea is that the cost of sales tax can be deducted from your total federal income taxes only in the case that one chooses to file the itemized deduction. This becomes incredibly difficult, as it means that the taxpayers need to keep a record of all their yearly transactions. This means that every transaction needs to be itemized and you need to find the sales tax on all applicable transactions that you have incurred during the year.
There is a second step to deducting taxes. You need to choose if you plan to claim either state and local income taxes or choose to claim sales taxes. This sounds a bit complicated, but I will break it down. The idea is that from your total federal income you can deduct your other income taxes or the sales taxes for the year. In most cases, people will choose to claim other income taxes, as those are higher than the sales taxes paid during the year. We need to be mindful that if you choose to claim the sales taxes, you will need a detailed itemization of each sale, so the IRS can calculate the right amount of sales tax to refund.
In these instances, it is very convenient to use the free online sales tax calculator. This way you can calculate the total amount of sales taxes paid, so you can make a benchmark with the income taxes paid / The state and local income taxes paid will be listed on your W2 and other business-related tax forms. The idea here is that if you had a year that you incurred big purchases and your sales taxes exceed the sum of the state income taxes plus the local income taxes, then you can choose to claim the sales tax. Remember that you will also need to create a detailed itemized list of all expenses during that fiscal year.
In this article we gave a breakdown of sales tax. We explained what is included in sales tax, who pays sale tax, and what other categories of taxes exist. This article will provide great value to business owners and taxpayers. The main benefit that I want you to get out of this article, is that the user of the free online sales calculators is very beneficial and also very easy.