How Do I Figure Out Sales Tax?
The sale of both physical products and services in any state demands a type of sales tax to be paid, and sales tax is that tax. When a sale is made, the sales tax is collected by the retailer and it’s then passed to the government. Each state has what we call a nexus, which is essentially the connection that business has to that state, as a result of which it is required to pay sales tax unless the sale is tax-free.
What is the Sales Tax?
Before we start, you should know that a sales tax is actually a consumption tax.
Let’s say a product is manufactured by a company and goes through multiple phases until it reaches the person who buys it at last, which is referred to as the end-user. That end user will be charged with retail/conventional sales tax.
Nowadays, most products pass through different phases to get to end-users; therefore, it is sometimes tricky to figure out who is responsible for sales tax. Keep in mind that each of the jurisdictions charges different sales taxes. There are several states with the highest level of sales tax and states where the residents are exempt from sales tax such as Alaska, Montana, New Hampshire, Oregano, and Delaware.
However, keep in mind that the states with no sales tax have to compensate for it somehow, and often do it through high-income tax.
The process of determining whether a business has to collect sales taxes in a specific state mostly depends on the way that the government specifies nexus. As a rule, a nexus is defined as a physical presence that does not have any limitations in having an office or storage. For example, New York has special “Amazon laws” which require online retailers like Amazon or eBay to pay sales taxes and the fact that they don’t have a physical presence makes little to no difference.
Sales taxes make up a percentage of the price of sold products. However, there are several products that are tax-exempt, such as certain types of food. There are also some products that have special excise taxes; in most cases, this tax is charged on alcohol and tobacco products.
Value-Added Tax or VAT
The main goal of incorporating the VAT is to address double taxation. Just like sales tax, VAT is also considered a consumption tax.
If you’re wondering what VAT actually is, it is a type of tax that is imposed during the total price of a physical product or a service during every stage it takes for that product or service to be produced or manufactured. Basically, from point A to point Z of the manufacturing process. The difference between VAT and sales tax is that sales tax is concerned only with the final destination product, whereas VAT belongs to every step of the process.
Reporting How Much Sales Tax You Have Collected
Once you have collected your sales tax, it’s time to report the results from each of the states where you’ve established a connection in the form of nexus. There are several states which have a fixed sales tax rate and pretty simple filling. All you need is just to figure out how much sales tax was collected from buyers in that specific state. However, this process can vary depending on which state you’re in. Some states can require additional information on your sales taxes not only in your state but also on the country level. Nowadays, small business owners try to automate the process of sales tax reporting.
Once you understand how much sales tax you have collected from each of the states, you can confidently start working on filling sales tax returns. If you wish to circumvent double taxation, you can do so using a sales tax exemption certificate which is exactly what we can help you with at Prestige Auditors, among so many other things! We can also run a sales tax analysis of your business and figure out which states you might have nexus triggers in!