Does My Business Owe Sales Tax?
When you’re starting a business, you might be wondering about your sales tax obligations and whether you need to collect taxes from your customers when making a sale.
There’s no easy answer to this question, and it varies depending on the type of product or service you sell and where you’re located. Here’s what you should know about sales tax and how it might impact your business.
Does your business owe sales tax?
Businesses are typically responsible for collecting the required sales tax on the items or services that they sell. However, some types of products and services are exempt. Here are two questions to help determine whether your business owes sales tax:
1. Do you have tax nexus?
A tax nexus is a connection a business has with the state in which it is located. Typically, when you sell products in a particular state, you must charge sales tax for that state. However, every state has different requirements, which consider physical presence, economic nexus, transactional thresholds, and other business activities.
2. Are your products or services taxable?
Whether or not your products and services are taxable depends entirely on the type of product you’re selling and where you’re selling it. For example, certain states don’t charge a sales tax on food items, while others do. Some states will collect tax based on the origin of the product whereas others tax based upon where you’re selling that product to. If your business is national, you must also understand the tax requirements for each state you are selling in.
When you’re starting a small business, it’s essential to research and review not only the requirements of the state you’re based out of but also the ones you may be selling to.
Businesses exempt from paying sales tax
There are certain types of businesses that are exempt from paying sales taxes. Examples of these businesses include:
- Educational organizations, such as schools
- Scientific organizations
- Literary organizations
- Religious organizations
- Medical organizations
- Government organizations
- Businesses that are purchasing goods for resale
These are typically nonprofit corporations that have earned a federal non-profit status through the IRS. In order to be exempt from charging sales tax on their products, businesses must obtain federal tax exemption status from the IRS. This process requires an attorney to handle the application and documentation in order to administer the exemption.
It should also be noted that some tax-exempt organizations may still have to charge sales tax. This is because certain items or products that are sold may not apply under the tax exemptions. As a small business owner, it is important to review both state and federal guidelines on tax exemptions before you start to sell products.
Get help understanding your sales tax obligations
As a small business owner, your tax obligations can be complicated. If you’re unsure whether your business should be collecting sales tax or what the tax requirements are in your state, contact the tax experts at Miller & Company today. Schedule a free consultation to start the conversation about your business’s tax obligations.