Taxes remain the top headache for small business owners, according to Capital One’s Small Business Growth Index. Among those surveyed, 47 percent say taxes are a major worry this year, despite tax reform intended to help grow business.
Meanwhile, the US Supreme Court will soon decide if states can force online retailers to collect sales tax on purchases. South Dakota is asking the justices to overturn a 1992 ruling that said retailers don’t have to collect state sales tax on online purchases if the company has no physical presence in that state. Online retailers say this would increase the cost and complexity of transactions, while other groups say it would level the playing field for small businesses.
No matter where you stand on that issue, complying with sales taxes is a big concern for you if you own a small business.
Here’s a quick primer of points from my book, The Profit Mentality: The Method for Making Every Decision a Profitable Success, to help you navigate the crazy quilt of sales tax laws and rules:
Sales Taxes Are Complex
State and local governments charge sales taxes when certain sales transactions are completed. The type of transactions taxed and the rates charged can vary from city to city or county to county – or there may be one flat rate for an entire state. Some products and services are taxed while others are exempt. Laws governing sales taxes differ significantly from state to state. To make matters even more confusing, companies are required to pay taxes on purchases they make and to collect tax on goods and services they sell. All this depends on the type of business you are in, who you sell to, and where the sales are completed.
The “Consumed” Quandary
Sales tax is due when an entity is considered the ultimate consumer of an item or service. When the tax is charged and who is responsible for paying it all depends on when the item is considered “consumed.” When it comes to business purchases, taxed purchases can include everything from office supplies to production equipment, vehicles, computers and certain services. In addition, items your company sells are taxable. You may be required to charge sales tax and remit the amount charged with a tax return monthly, quarterly or annually depending on the volume of business.
If your company purchases a product or service for its own use, you must pay the appropriate amount of sales tax regardless of whether or not the tax is charged on the vendor’s invoice. If an item is purchased from a vendor in the state in which it is be delivered, you can simply add the appropriate tax amount to the invoice and include it in your payment.
Even though you probably won’t be charged tax on an invoice for items that are purchased from out-of-state vendors, you are still required to submit the “use” tax to your state. When the item comes from another state you must include the tax due on the return you file with your state and remit payment with the return.
If your customer claims to be exempt from tax for any reason you must request an exemption certificate or a resale certificate depending on the requirements in your state. Keep this document on file in case the state audits your business. Without it, you will be held responsible for not having collected the taxes and your company will be billed for the tax plus penalties and interest. The same is true for your company. If your business deals in items that are “resold” in any way, you can provide a certificate to the vendors providing those items and avoid paying tax on the purchases. However, be very certain that you understand the requirements associated with the tax exemption. The laws can be extremely complex and quite ambiguous.
Invoices Are Critical
Your sales invoices must make clear what items are being taxed, the sales amount charged for those items, and the amount of tax charged. You should separate the specific types of products and services into different line items on the invoices. Otherwise you can be charged taxes on sales that would otherwise be non-taxable. This mistake could cost your company a lot of money. Don’t end up paying when you didn’t have to.
Get Professional Advice
This is only a broad overview of the complexities of sales taxes. Unless you are a sales tax professional, you probably don’t fully understand the sales tax laws of your state. And in most cases CPAs are not well versed in sales tax law either and would not be a good source of advice. For many businesses, sales tax represents the largest exposure for audit related problems. When a company is found to be delinquent, penalties and interest can often exceed the tax due. Don’t take chances. Get appropriate professional advice. It’s a very worthwhile investment that can save you many headaches – and a lot of money.
A final word that applies not just to sales taxes but all taxes: always pay them when they are due. Penalties and interest on delinquent taxes can accumulate very quickly. You can face personal exposure beyond your role as business owner. Depending on the situation, the government can seize property and sell it at auction, freeze bank accounts, and file civil lawsuits and/or criminal charges.
Tax laws are extremely complex and require the assistance of a competent tax professional. Take the time to understand your business taxes and make sure you get the help you need.