If you’re a new business owner, you may wonder what you need to know about sales taxes. A lack of knowledge is costly. If you wrongly think you don’t owe the tax and don’t collect, or if you correct too little, you could have to pay big fines and penalties. In fact, there are several scenarios which could cause your local state government to come after you regarding sales taxes. Here are some things you need to know.
Reasons Your State Government Would Come After Your Small Business
- If you sell products online, you may wrongly think there is no federal law regarding sales taxes for products online, so you don’t have to collect or pay sales tax. While that is true to an extent, some states, including California, Florida, and Texas have laws requiring out-of-state ecommerce companies to collect taxes.
- If you are in a state that charges a sales tax on goods sold, it also charges a use tax, designed to minimize unfair competition between goods made out-of-state and in-state. If your business buys goods from another company in your state, you owe sales tax. If it buys goods from a company in another state, you won’t owe sales tax. You will, however, owe a use tax for the use, storage, or consumption of tangible personal property. Companies are responsible for self-assessing and paying the tax.
- Even if you don’t sell directly to a customer, you may be a part of the transaction through a supply chain. You must prove exempt status by obtaining an Exemption Certificate. The rules for the certificates can vary depending on circumstances.
- If you file for a state tax certificate, you must pay the tax, to avoid possible fraud charges.
- If you collect the tax but do not file for a tax permit, fraud charges are possible.
- If you wrongly believed, for whatever reason, you didn’t owe the tax and didn’t collect it, don’t think your lack of knowledge will be reason enough to avoid an audit. It won’t.
- Sourcing rules determine which state decides whether a particular sale is taxable. Sales made within a single state follow taxing rules as far as the shipped from address. This is origin sourcing. It is the opposite for sales between states. Whether something is taxable or not is based on the shipped to address. This is destination sourcing.
- Destination sourcing is tricky if your business operates in multiple states or is a part of a supply chain. If you use drop shippers in other states it is more confusing. Knowing when to charge or not charge tax is complicated and creates risks for your business.
What Can the Penalty Be if My Business Doesn’t Collect and Pay Sales Taxes Correctly?
An audit can cost a business a lot of money, with online estimates ranging from a minimum of $5,000 to $100,000. Despite this, many businesses today calculate and resolve tax issues manually, despite how complicated the tax system is, and how inefficient the method is. Whatever the cost is, a small business owner would be wise to avoid it.
In addition, the IRS is more likely to audit certain types of business: Medical or dental, retail, hospitality, construction, manufacturing, and distribution services. Some businesses even set money aside in case of an audit. Besides an audit, the IRS can charge a business that didn’t pay sales taxes correctly with fraud.
Other ways not paying your taxes correctly causes problems is for the possible future sale of your business and if you want to sell through a large distribution channel, such as Walmart.
Some Sales Are Exempt From Sales Tax
Some sales are exempt from sales tax. For example, non-profit agencies don’t have to collect or pay sales tax. Some states allow a tax exemption for computers and accessories used in business operations. An accountant could tell you if this applies in your case. A manufacturer that processes a product and resells it in a different form is tax exempt on anything used in the manufacturing process in most states. Some services are tax exempt, and an accountant would be able to tell you if this applies in your case.
For more information, feel free to contact us.
