As a buyer, you walk into any retail store, pick up the item you want to purchase and then pay for the cost of the item plus sales tax at the cash register. It seems simple enough. As a small business owner, however, sales taxes can be more complicated and potentially more costly than you think.
Here are some elements of sales and use tax law that may impact your small business:
- Jurisdictional rules. Individual sales tax rates vary not only by state but also by location; individual counties and local governments can add their own tax assessment to the base state rate. In states like Alabama, for example, the rates can vary by as much as 8.0% from one jurisdiction to another. If your business includes more than one location, make sure you are charging and remitting the correct amount of tax for each location.
- Rate changes. State and local jurisdictions change their sales tax rates in response to their changing revenue needs. Make sure you subscribe to your state’s update notification system or consider using an authorized sales tax provider like Avalara to keep your sales taxes up to date.
- Shipped items. If you are shipping goods or services out of state, you may not be liable for sales taxes on sales to customers in that state. (Your customers, however, may be liable for use taxes.) Consult with your tax advisor to determine your liability for collecting and remitting sales tax in other states. Generally, you must have a “physical presence” in order to have a liability for taxes in that state.
- Items you purchase. When you buy goods or services from one state for shipment into your home state, you may not be charged sales tax. You may instead be responsible for paying use tax on that item in your home state. Most states assess use tax on the value of any taxable items that are used or consumed in your home state.
- Item differences. Sales tax rates may not be uniformly applied across all items that you sell. Make sure you are aware of any unique rules for sales of goods or services based on the sales tax matrix that applies in your state. Your Sage 50 application can be set up to assess and report the sales taxes you identify for individual inventory items.
- Accounting. Sales taxes collected are not a revenue item; they are a liability for taxes due to the appropriate taxing authority. Make sure you are properly recording any taxes collected as a sales tax liability on your balance sheet. As payments are made with your sales tax return, reduce the sales tax balance by the amount of the payment. Use taxes paid on items you purchase should be recorded as a use tax expense in the period in which they are incurred.
- Audit adjustments. Sales tax auditors will not only review the amount of taxes you collect and remit on items you sell, but they will also review your purchase invoices for payments of the correct amount. They will then ask to see your use tax payments. Any sales and use tax assessments that result from an audit are recorded as sales/use tax expense, which goes straight to your bottom line.
It pays to stay informed about sales and use tax rules, rates, and assessments. Don’t assume that one rate of tax applies to all of the items you sell, all of your customers, or even all of your locations. Consult your tax advisor or implementation consultant for help correctly assessing, collecting, and remitting sales and use tax in your business.