Common sales tax trouble areas businesses face

sales tax trouble

sales tax trouble

Staying compliant with sales taxes can be a challenge. You need to keep track of different sales tax rates across the country, deal with constantly changing rules and exemptions, and make sure to remit your collected taxes and return on-time. And this is just for normal, everyday transactions. There are a few tricky situations that can leave just about anyone feeling confused about tax law. Here are the answers to some common sales tax trouble areas that regularly come up in the world of sales taxes.

Taxes on shippingsales tax trouble

One common question that business owners have is whether or not they need to collect taxes on the cost of shipping. On one hand, they are charging their customers for this extra cost. On the other, the money coming in isn’t revenue for the business. The answer comes down to a few factors.

First of all, does your state charges taxes on shipping? Eighteen states do not, so if your business is in one of these states, you won’t need to charges sales tax for shipping in-state.  Taxability of shipping also can depend on whether the shipping charge is stated separately on the invoice.

If your state does charge sales taxes on shipping, it depends on whether or not the sale itself is taxable. If you’re selling something that is taxable, you also need to collect taxes on the cost of shipping. If you’re selling something that is exempt from sales taxes, you don’t need to collect sales taxes.

The situation gets a little more complicated when you’re shipping out-of-state. You typically don’t need to collect taxes on any portion of an out-of-state sale unless you have nexus in the other state. Nexus is when your business has some presence in the other state, like owning a building. In this case, you would need to collect sales taxes for the other state based on the sourcing rules of the other state. Destination-based states would have you charge sales tax on shipping for taxable sales A) based on the states shipping rules, and B) at the rate of the “ship to” address. Origin-based states would work similarly but the sales tax rate would be based on the location generating nexus for your business.

Taxes when a customer pays in installments or is late on payment

Completing a sale takes two steps. First, the customer agrees to make a purchase from you and second, you need to collect payment for the sale. For smaller sales, this happens all at once. However, if you’re selling larger items, there can be a significant gap between when you make the sale and when you collect payment, like if you make a sale on credit, in installments, or a customer is just late on payment.

In these situations, the process for collecting sales taxes depends on your accounting system for recognizing sales. If you use an accrual system, you recognize a sale as soon as it is made, not when you collect payment. You’ll need to remit sales taxes for this sale on your next sales tax return, even if it’s before the customer makes payment.

If you use a cash system, you don’t recognize a sale until you receive payment. If you get paid in installments, you’ll need to collect the sales taxes on each separate installment. If a customer is late on paying you for a sale, you won’t need to remit anything to the government until the payment comes in.

Taxes when a customer doesn’t pay

If a customer doesn’t end up paying you for a purchase, it can create another problem for sales taxes. This doesn’t matter for a cash system because you still haven’t remitted any taxes. However, if you’re using an accrual system, you’ve paid sales taxes for a sale that you’ll never receive money for. In this situation, the government will give you credit for the excess taxes. For example, in Texas this is known as a bad debt deduction. You’ll be able to carry this deduction over your next sales tax return to reduce the total you’ll need to pay for that period or you could be eligible for a sales tax refund.

Taxes for rebates and coupons

One other tricky situation is when you are selling a product at a discount because of a rebate or coupon. Do sales taxes apply to the original value of the good or only to the discounted price? The answer comes down to who is providing the discount: is it your business or your supplier?

If your business is providing the discount, then sales taxes only apply to the discounted price. If the discount is coming from your supplier, then you still need to collect sales taxes on your original sales price. This is because the government considers a supplier rebate to count as an adjustment after the sale in your store took place.

Staying compliant with sales taxes isn’t always easy because of tricky situations like these ones. However, now that you understand how to get around these issues, your future sales tax returns should be a little more manageable.

How can you tell if a transaction should be sales tax exempt?

sales tax exempt

sales tax exempt

State governments charge sales taxes on many purchases but not on all of them.  Each state exempts a number of transactions from sales taxes. You need to be aware of these exemptions so you can avoid collecting unnecessary taxes while still staying compliant.

Common types of tax-exempt sales

sales tax exempt

In many states, the sales of farm equipment is one of the types of transaction that are exempt from sales and use tax.

While each state has different exemptions, a few categories come up regularly. Sales to non-profit organizations like schools, churches, and hospitals are often exempt from sales and use taxes. If you are selling merchandise to another business that plans to resell the items, the sales could be sales tax exempt.

Some household necessities like food and medicine can be exempt from sales taxes as well.  To stimulate the economy, some states also exempt sales to manufacturers or farmers. These are some categories that pop up regularly but what will be sales tax exempt for your business really depends on where your business is located.

So how do you figure out exactly what is exempt? Well, first-off purchasers need to show you a tax exemption certificate before they can make tax-exempt purchases. You are responsible for keeping  an updated copy of this certificate on file. You also have a couple options yourself to predict what sales you’ll need to collect taxes on and what you don’t.

Option 1 – Go straight to the state

State governments do their best to make sure business owners can quickly and easily determine which sales should be taxable and which shouldn’t. The office in charge of taxation for your state should have a website where it lists tax-exempt items. The name of this office is different in each state. For example in Washington it’s called the Department of Revenue while in New York it’s the Department of Taxation and Finance. However, the role is the same: to manage taxation for the state.

If there is anything that seems unclear on the website, you can try contacting the department directly. Most state offices take questions through phone, e-mail, or you can visit the branch in person if you live close enough. This can work well because you’re getting the answer straight from the source, but isn’t always convenient and government service isn’t always fast.

Option 2 – Hire a sales and use tax specialist

Since tax laws are always changing, keeping up with the sales and use tax exemptions can become a full-time job, especially if you’re dealing with multiple states and counties. Another way for your business to keep track of rates and rules is to work with a sales and use tax specialist. These companies stay on top of every change so you don’t have to. This way you can focus on your business while someone else makes sure your company stays compliant with tax law.

Either option can work, just be sure you are keeping track of sales tax exemptions to help keep your business and your clients following the rules.

Sunscreen exemption helps broiling Texans

Sunscreen exemption

Sunscreen exemption

Texas sunscreen sales tax exemption

The Texas Comptroller of Public Accounts would like to remind all retailers that the sunscreen exemption takes effect for sales and use tax as of June 18, 2012.

The timing coincides with an FDA ruling establishing labeling and testing requirements for over-the-counter sunscreen products.

For more information, check out Sunsetting the Sales Tax on Sunscreen.

South Carolina house takes sales tax exemptions off the chopping block

tax exemptions

tax exemptions

By Lucinda Rowlands, Zip2Tax

Sweetgrass baskets are sales tax exempt in South Carolina

Sweetgrass baskets are among the items that will remain sales tax exempt in South Carolina for at least 5 more years.

The House Ways and Means Committee on April 25, 2012 approved a bill eliminating 22 exemptions, after putting about a dozen back on the exemption list. The bill initially eliminated exemptions worth more than $250 million. The amended bill reduces that to roughly $15 million.

Items put back on the exemption list included:

  • lottery tickets
  • gold and silver
  • sweetgrass baskets
  • motion picture companies’ supplies
  • packaging used by manufacturers
  • newsprint
  • electricity used by television broadcasters
  • equipment bought by laundries and dry cleaners
  • and the penny-on-the-dollar sales tax discount for residents 85 and older.

The committee also reinstated two sales-tax-free weekends: gun sales on Thanksgiving weekend, and back-to-school supplies the first weekend of August.

Representatives said the bill was basically pushed through committee as quickly as possible because the deadline for moving bills from one chamber to the other was rapidly approaching.

Rep. Tommy Stringer said one vital part of the bill remains intact, the part requiring sales tax exemptions to be re-evaluated every five years helps ensure outdated exemptions don’t stay on the books.

House Minority Leader Harry Ott said the items left in the bill are there because no one spoke up to keep those exemptions.