There are different types of taxes on the selling and purchasing of goods. Generally, these taxes differ from country to country but can also differ from state to state. This sales tax guide will discuss everything you need to know about Sales Tax and how to pay taxes for your business.
What is Sales Tax?
Sales tax is an amount of money, calculated as a percentage of a product’s value, charged at the exchange point or purchase. A business is liable for sales taxes in a given jurisdiction if it has a nexus there.
In simple words, you can refer to sales tax as retail, excise, or privilege taxes paid by the buyer and collected by the seller. The seller is soon obliged to remit the collected tax to the concerned tax agency within a defined period.
What is Sales Tax Used for?
Sales taxes play an essential part in the growth and development of a nation, and our sales tax guide will show you a few reasons why you have to pay sales tax:
- Community Development
- Public Services
- Protective Services
- Special Purpose
Where Does Your Sales Tax Go?
Are you wondering where the sales tax goes? It goes to the government as the seller is liable to pay the collected sales tax to the appropriate tax agency. The government uses this money for public services such as education, infrastructure, defense services, etc.
Many areas of some countries rely on sales tax to fund their budgets so that they can use it to build schools, roads, parks, and other government-owned buildings and to maintain fire departments, police stations, and other protective agencies.
Why is Sales tax Different at Different Locations?
The sales tax rate can change based on your location, as different states have different laws regarding the implementation and collection of sales tax. Each state and local government can set the tax rate while some categories are also expected from state sales tax.
In simple words, State Governments in most countries have the power to decide on Sales Tax, which depends on the financial requirements of a particular state. Most states classify businesses dealing with goods under categories: Manufacturers, Dealers, and Sellers.
Do You Have to Pay Sales Tax?
Yes, you have to pay sales tax in almost all states that impose it, and each state can decide whether or not to have a sales tax. Generally, this tax is charged from buyers at the point of purchase of some goods and levied by the Central and State Governments.
If you’re a buyer and the seller fails to charge you a sales tax, you don’t have to pay it. However, if you are a seller and forget to collect a sales tax from buyers, the concerned authorities will take your tax due and may ask for penalties or interest.
What is Use Tax?
There are different sales taxes, including Manufacturers’ Sales Tax, Wholesale Sales Tax, Retail Sales Tax, Value Added Tax, and Use Tax. Use Tax is a tax on goods and services purchased outside of a buyer’s home state or something they didn’t pay sales tax on.
When a tax on goods or services is paid to a governing body directly by a consumer or buyer, it is called a Use Tax. It is the same as the local sales tax and includes both state and local state taxes. A resident who fails to pay use tax may be subject to penalties and interest.
Do I Need to Collect Sales tax?
In several states, you will need to collect sales tax for doing retail business and making sales in those states. This will also depend on several factors like the product/service you are selling, your business location, and your customer’s location.
If you have a nexus (sales tax presence) in your state, you or your business must collect and pay sales taxes to the concerned authorities. Also, you need to be aware of the laws related to sales tax in your area, as each state has its own set of rates and requirements.
What is Nexus?
The level of connection between a taxing jurisdiction and the seller or retail business defines the Nexus. As it is the only connection between the seller & the state, no state or authority can impose its sales taxes on you until it is established.
There are several types of Nexus. This includes Physical Nexus (sufficient physical presence in that state), and Economic Nexus (a certain amount of sales or a number of transactions in that state). If you have Nexus in a state in any form, you need to pay sales tax.
Being an Online Seller, How Do I Collect Sales Tax for Goods that I Ship to Other State Customers?
For the address to which you are shipping, you would charge the destination state’s rate and not additionally collect your state’s sales tax on products you are shipping out of state. The process of determining which tax rates apply is called ‘sales tax sourcing.’
Furthermore, whether you will collect sales tax for goods that you ship out-of-state will depend on whether you’re operating in an ‘origin-based’ sales tax state or a ‘destination-based’ sales tax state. As the laws may differ from one state to another that you need to know.
How to Outsource Sales Tax?
Sales Tax Outsourcing helps you focus on your business rather than the time-consuming tax compliance activity. Today, many businesses outsource sales tax to gain access to tax experts and reduce the costs of hiring a full-time employee.
With sales tax outsourcing, you get an off-premise team that manages your sales tax and addresses all related issues like taxability, Nexus, exemptions, audits, etc. A reliable company will provide services through a network of highly-skilled and trained practitioners.
Should You Make Use of Sales Tax Software?
There are many benefits of sales tax automation, especially when the competition is fierce and compliance with laws is imperative. With the retail industry undergoing tremendous transformation every day, it is good to use sales tax software.
The retail sector also faces increasing pressure from stakeholders. And with automated systems, they can improve accuracy and optimize the business. You can be more responsive to your customers and stakeholders by automating bookkeeping and taxation.
The Final Thoughts
While looking for professional assistance for sales tax, some names rule the world with Avalara, Vertexinc, and Taxjar, to name a few. Though there are many options for you in the market, some famous names are doing great.
Reasons to Hire an Outsourced Sales Tax service:
- You will not have to worry about generating month-end sales and using tax filings.
- You can achieve more accuracy which may not be possible with manual processes.
- It helps you deal with any sales tax court cases (as in the case of South Dakota vs. Wayfair Inc.)
- No need to keep up with changing compliance forms and filing requirements.
- Easy ongoing management of notices from all jurisdictions and dealing with staff turnover
- Tax experts will do everything for the time-consuming tax season preparation.
- The professional assistance helps you deal with the lack of scalability in manual approaches as compliance demands increase.
- Using a secure online portal for sales tax and other taxes enables you to store all client data files, notices, returns, and reports.
How to evaluate sales outsourcing providers:
- It is worth doing some research by thoroughly assessing the approach and commitment of the service providers.
- Check out the reputation of the service provider that they’ve built up over the course.
- Ask for references. Any reputable firm will be happy to provide a list of references across various industries they’ve served.