Business owners, it’s time to find out if your company is following four fundamental sales tax laws!
Tax laws are a big part of managing any business, and notably, sales tax laws are changing all the time. In this article, we look at four sales tax laws you should understand and adhere to, irrespective of how you make your money. Your business may be online, in a brick and mortar store, or provide a technology service. Right now, you may be unaware of these rules, so familiarize yourself with them as soon as possible.
The Minimum Dollar Amount Or Sales Nexus Rule
The sales tax nexus is the minimum number of sales or money that should be reached to pay sales tax to the state. Many rules around America allow exceptions for small businesses. Because of this, small businesses can avoid paying or charging sales tax because they are not making enough money to warrant sales tax charges.
Every state has set up different rules that should be followed carefully. For example, Kansas has no threshold, and the state offers no protections for small businesses. On the other hand, Tennessee has a nexus threshold of $500,000. Check the rules for your state carefully because these rules may also include items like tobacco. Maryland has included tobacco in its sales tax rule so that tobacco is not taxed individually when sold by small businesses.
The Minimum Transaction Rule
Under these rules, small businesses will pay sales tax based on the number of completed transactions in the state. This means that the company should have a fairly high volume before it has to pay sales tax. States that enacted rules to protect small businesses can prevent small businesses with just a few transactions a month from paying sales tax.
These companies might find it difficult to maintain their customer base if they charge sales tax, and larger companies will generally pay sales tax because they are high-volume businesses. If your company is small, you may want to keep the number of transactions as low as possible so that you can avoid paying or charging sales taxes. Use a minimum order policy to avoid paying sales tax, or simply leave your site open for sales for a short period.
Charging Sales Tax From Only Local Customers
Some states only ask that businesses charge sales tax from local customers. This means that these companies must use software to charge sales tax when their customers set up online purchases.
Buyers must enter their personal information to be identified, and the business should collect sales tax from anyone local. These sales tax rules have long been around to help local enterprises to collect sales tax from local customers. For example, a local customer could have bought from their favourite store online to avoid paying sales tax.
With the advent of grocery delivery and pickup websites, someone who was online could almost remain anonymous. Now that these sales tax rules have been enacted, every local customer must pay sales tax where it is applicable. Stated without a sales tax, such as Delaware, do not apply.
The Single State Rate Rule
The single state rule sales tax uses the sales tax nexus to determine which companies should charge sales tax. These companies must have a certain number of transactions or volume for the year. These companies will charge sales tax because they meet the requirements laid out by the state. A state that does not offer protections for small businesses will ask everyone to charge sales tax.
However, individual states have a base tax rate for all online purchases. This is different from charging an unprecedented sales tax rate in each jurisdiction. This can be confusing or frustrating for customers. Moreover, businesses in a location with a high sales tax rate might lose customers because they are charging seven, eight, or even nine per cent sales tax on each sale. For example, Tennessee offers a 2.25% uniform rate to all companies in the state. This may be a simple way to save customers money, and it might be a way for some companies to retain customers when their local sales tax rate is much higher.
When you are trying to manage a business, you need to be aware of your state’s sales tax rules or jurisdiction. Every state is slightly different, and you need to know if you must meet the nexus requirements. You are required to pay sales tax no matter the volume you have or pay a uniform tax rate instead of the local tax rate. Inform yourself about these rules in your state before you post your items online. If you are not charging the proper rate, you could be held liable for back sales taxes.
Ignorance is not bliss, and when it comes to the law and your business. Not knowing the law is no excuse, therefore as a business owner or manager of sales, make sure you’re fully informed of your sales tax obligations so your focus can be honed on profitability and improving the bottom line. So what other laws might your business need to know?