State Sales Tax
If you sell merchandise at retail, your state, and even local government, may require you to collect sales tax from customers who live in your state when they make a retail purchase from you.
Sales tax returns are generally filed with your state and local governments monthly and the tax remitted along with the return.
The sales tax permit (or license) has a number assigned to it. This number generally appears on the sales tax return.
Who Must You Collect Sales Tax From?
As a general rule, sales taxes are paid by the ultimate consumer. State law generally requires retailers to collect sales taxes, file sales tax returns, and remit the collected taxes. The filing and remitting process is normally done on a monthly basis.
Certain types of sales are generally not subject to sales tax. You're generally not required to collect sales tax on the following types of sales:
- Out-of-state sales:
- Generally, if you sell merchandise to anyone who resides outside of your own state, you do no have to collect sales tax.
- Sales for resale:
- You're not required to collect sales tax from a reseller of your merchandise.
- If your merchandise is resold by a reseller of your merchandise, the reseller is required to collect the tax.
- Sales taxes are generally not required to be collected on revenues derived from the performance of a service.
Audit Proof Yourself
If you sell merchandise to a reseller or make out-of-state sales, these types of sales, as previously discussed, are excluded from sales tax. To ensure you don't end up having to pay sales taxes on these nontaxable sales, should you be audited by the state, you must obtain a resale certificate or exemption certificate from the purchaser of your goods and .
When I was the Controller of a large printing company, I was only working there for a few weeks when the company was hit with a sales tax audit.
The auditor randomly selected copies of several large dollar value invoices from each of the preceding three years. Each invoice was billed to a different company located within the same state as the printing company. They were resellers of the print-product sold to them by my company. Since they were resellers, no sales tax was charged.
The auditor, having selected about 75 invoices from the three-year period, wanted me to produce an exemption certificate for each company indicated on the invoice.
Apparently, the previous Controller was a little lax in getting an exemption certificate from all in-state resellers. As a result, many of the invoices were classified as taxable sales. Based on a statistical sampling over the three-year period, the auditor came up with an estimate of the sales tax deficiency, which we ended up having to pay.
To protect yourself:
- Get an Exemption Certificate from every reseller.
- Keep two separate sales accounts:
- One for taxable sales
- One for nontaxable sales
- For all nontaxable sales, make sure you have an Exemption Certificate (or reseller certificate, whatever it's called in your state) on file for each customer listed on the invoice.
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- Return to the Tax Basics for Startups Table of Contents to find related links.