Although sales tax can be complex, there are a few simple tips that will help your business remain compliant with state regulations!
Know Who Is Responsible
The end-user of a product is the one responsible for paying sales tax on that item. For example, a retail store purchasing inventory for resale does not have to pay sales tax on those items. Instead, the customers (end-users) purchasing the items pay the sales tax. However, if that retail store needed to pull a bottle of cleaner from inventory to clean up a spill in an aisle, the cleaner would then be taxable to the grocery store. The cost would be reported and “use tax” would be calculated on that cost.
Businesses should monitor their bills and confirm sales tax is being paid on the correct purchases (expenses). For example, a restaurant would be exempt for food purchases, but items such as paper goods are taxable.
If both food and supplies are purchased from the same vendor, monitor your bills to be sure sales tax is being charged only on the appropriate items. Monitoring this may prevent your business from under- or over-paying on sales tax.
Example: A recent audit of one of our “KLients” revealed that a local utility company charged zero sales tax for an extended period of time. Although this was the utility’s fault, the KLient was still liable for the sales tax that should have been charged during those months.
Keep Copies of Certificates on File
If sales tax exempt, customers must be able to produce a sales tax exemption certificate at time of purchase. For example, a nonprofit would be sales tax exempt so a copy of the certificate must be provided to the business they are purchasing from. Without this form, there is no proof of exemption and sales tax would need to be collected. The business is responsible for keeping copies of these sales tax exemption certificates on file. If copies are not kept, a business would not have proof of why taxes were not charged, if ever questioned during an audit, and may end up having to pay that “uncollected” sales tax.
Staying on top of your tax responsibilities remains a critical way of ensuring that your business is as profitable as it can be and avoids paying unplanned taxes or fines down the road. That said, sales taxes are an extremely complex area, and this article only touches on some of the many issues that affect it and your specific liability for any given situation. Consult with a tax advisor who knows the sales and use tax laws in the state(s) where you operate to ensure you’re fulfilling your obligations yet not paying more than is required.
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