Sales and Use Tax

When you start a business there is a laundry list of taxes that you could be responsible for. Knowing what these are and whether or not they apply to your business is key. In this article we will go more in depth of what Payroll Taxes is and who it attends to, as well how much would it cost.

What is it?

Sales tax is collected by a business when it sells a good or service to a consumer.

Use tax is a type of sales tax on purchases made for taxable items that will be used, stored or consumed for which no tax was originally paid when purchased. Use tax is typical when making purchases outside one’s state of residence. Use tax is also typical when goods are bought whole sale (thus tax exempt) for resale, but end up being used in the business instead. 

Who pays it?

Sales tax is paid by any business who collects it from clients when selling a good or service. Use tax is paid by any business that uses a product or good in their business that they bought tax-free or tax-exempt.

Example: You run a pet grooming business and retail pet supply store. You buy products such as scarfs and doggy shampoo as a wholesaler and are tax-exempt on that purchase. You sell some of the products in your business. When you do, you collect sales tax from your customers when they purchase. You then use some of the scarves and doggy shampoo in your grooming part of the biz. Because you didn’t pay sales tax when you purchased the products as a wholesaler and you didn’t collect sales tax from a customer because you didn’t resell the product in your store, you will have to pay use tax for the consumption of the product within your business. Other industries where use tax is commonly seen are carwashes, spas, salons.

How much is it? 

Sales & use taxes use a percentage calculated based on the price paid for a good or service. The percentage varies from state to state and locality to locality. California has the highest state-level sales tax rate at 7.25% Five states don’t have statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. When you combine state and local sales taxes, Chicago, IL and Long Beach, CA have the highest rate at 10.25%.

How do you pay it? 

Businesses report and remit sales and use tax payments to their state and local governments to which the tax is owed. This can get tricky! Some places allow you to pay your state tax with your city/local taxes; some don’t.

It's also important to note that just because you do all of your business in one state doesn’t exclude you from POSSIBLY of owing taxes to another state if you have out-of-state customers. We advise NOT trying to do your own sales tax returns, especially with the new laws and rules from the 2019 Wayfare Act. We recommend using a 3rd party such as TaxJar or Avalera.

What about Nexus?

Nexus is a topic for an ENTIRE live all in itself! However, things really changed in 2019 with the Wayfare Act. If Nexus is something you want to learn more about, let me know!