As a small business owner, you’re obligated to pay local and state sales taxes on the goods and services you sell to your customers. Not paying your sales taxes can result in civil and criminal penalties, so it’s important to know, understand and comply with the law. Here’s how.
Sales taxes are taxes assessed on goods and services sold. They’re typically assessed on a percentage basis. For instance, if you’re required by the government to levy a 9 percent sales tax, that means your customers must pay 9 cents in taxes on every dollar they spend.
Sales taxes are levied by state and local governments and vary from state to state and even municpality to municipality. For example, your state may levy a four percent sales tax and your city a three percent sales tax, while a neighboring city may levy only a one percent sales tax. This means your customers will pay 7 percent in sales taxs, while in the neighboring city will only pay 5 percent in sales taxes.
As the business making the sales, it’s up to you to charge your customers the sales taxes required by your state and local government and pay these taxes to the appropriate governmental agenices.
For starters, you’ll need a state sales tax permit, which you can obtain from your local branch of your state’s revenue department. This gives you an identification number and permit to collect sales taxes.
Here’s a few simple steps to help guide you through the process of collecting and remitting sales taxes.
- Determine if your business is obliged to collect sales taxes, and on what products sales taxes must be collected. Some states and localities have sales tax exemptions for groceries and other items.
- Charge the appropriate tax on each transaction. You may either add the charge to your customers’ bill or embed it in the price of your goods. For example, if you’re selling a product for $100 each and the sales tax is seven percent, you can charge the customer $107 dollars or just charge $100 and deduct the appropriate amount of sales tax from your profits.
- Keep track of collections. Open a bank account specifically for sales tax collections and deposit them into the account each day. Do not mix your sales tax money with your business’ accounts.
- Remit your sales tax by the monthly deadline. If you miss remitting your sales tax by the deadline, you can incur a hefty penalty.
- Use tax forms provided by your state’s department of revenue to submit taxes. Also keep careful records of your sales in the event of an audit.
Proper collection and submission of sales taxes is important, as failure to comply with the law can result in penalties and interest. Using software or devices to “cook the books” and suppress sales taxes can result in criminal charges.
If you’re selling products online, you’re typically not required to collect sales taxes for the state your customer is ordering from unless you have a physical presence, or nexus, as defined by law, in that state. However, states have recently begun pushing to require businesses to collect and remit sales taxes. Enforcement of such an action may be problematic, however.
Customers who buy products online are required by law
If you’re unsure about what items you’re required to collect sales taxes on, or sales tax rates, contact your state revenue department. They can provide you with the information that you need, as well as the appropriate forms for submitting sales taxes.