Understanding Sales And Use Taxes

Despite being around for centuries, taxes remain a challenging concept for most Americans to grasp. 

A 2013 IRS report estimated that the average American spends over 13 hours preparing and filing taxes.

Tax categories that might prove difficult or even confusing to most of them and small businesses are the sales and use taxes, which apply in 45 states along with the District of Columbia, Puerto Rico, and Guam. 

It shouldn’t have to be this way. Fortunately, this resource should help you understand what this is and help you stay out of trouble with the authorities.

This article will explore sales and use tax, its designated tax licenses, and the legal consequences of not filing and remitting them.

Sales And Use Taxes 101

First of all, sales tax describes levies paid to the state after selling particular goods and services. The seller of a product collects a sales tax at the point of sale. 

The due taxable amount is added to the product’s price and charged to the product’s end-user or consumer. The seller then files and remits the taxable income to the state when reporting their tax returns.  

On the other hand, a use tax is a conditional tax charged on goods purchased without paying a sales tax that is typically mandated in the buyer’s home state. 

A typical example of use tax at work is when a user goes to another state where no sales tax is levied and acquires a product they intend to use, store or distribute where sales tax would typically apply. 

There are two types of use taxes: 

  • Consumer use tax: Consumer use tax is self-assessed by the purchaser of a product on taxable purchases where the vendor did not collect a sales or vendor use tax. The self-assessed and collected levy is then submitted to the taxing jurisdiction. For example, a business may acquire a fleet of cars from another state. If the seller in that state does not charge them sales tax, they must pay the use tax when the vehicles arrive in their jurisdiction.
  • Vendor/Retailer use tax: The tax collection and submission fall upon the product vendor. If a purchase was subject to taxation in the buyer’s home state, the seller must collect the tax and remit it to the purchaser’s state. For a vendor to be eligible for a retailer use tax, they must hold a state license that permits them to sell their goods in the respective state under a nexus. A nexus is a seller’s connection with a state that requires them to register, collect, and remit taxes.
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Use taxes are only complementary or compensating taxes. They are put in place to discourage buyers from purchasing products not subjected to sales tax within the taxing jurisdiction. 

Generally, use and sale taxes apply at the same rate. A use tax is not included if a sales tax is applied to a product during its sale.

The US Census Bureau in 2014 reported that sales and use taxes accounted for 32% of all state taxes. That showed that these tax brackets were not as efficiently collected and reported as they should be. 

Following its circulation, many states continue to enforce audits to ensure that information reported and filed by businesses is correct per tax laws.

If you struggle with them, getting professional help from the best accountant in Philadelphia or wherever you are is the wisest course of action.

Common Types Of Sale And Use Tax Licenses

To start a business in Philadelphia and other US cities, you must obtain a seller’s permit or a sales tax license.

Nonprofit organizations and sellers of other non-exempt products like clothes, groceries, prescription drugs, and OTC drugs do not need such licenses.

Some of the most common types of sales use tax licenses that businesses are required to have include:

  • Sales, use, hotel occupancy tax license
  • Promoter license (license to promote events such as festivals or sports in the state)
  • Transient vendor certificate (license to sell goods at a temporary location like a flea market)
  • Employer withholding tax license (the amount employer withholds from a team member and remits to the government)
  • Vehicle rental tax license
  • Tobacco product license
  • Wholesaler certificate (allows businesses to purchase directly from distributors for resale)
  • Unemployment compensation
  • Workers’ compensation coverage
  • Public transportation assistance tax license
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Most states in the US prefer punitive measures for businesses and individuals that fail to pay their fair share of sales and use tax. 

For example, failure to pay a sales tax is considered a misdemeanor in Pennsylvania. A defaulter may be slapped with a fine and mandated to cater to the cost of prosecution.

They may get a prison term of up to one year, depending on the severity of the charge. Such people are usually held liable for embezzlement.

Be Aware

If you’re a business owner, you need to know how to get a sales tax permit, file a sales tax return, or make tax-exempt purchases for resale. 

For most enterprises, these nuances are far too taxing and time-consuming to consider. But when not handled properly, they may face penalties and steep fines for not filing the appropriate returns or not operating as stipulated by law. 

To avoid such penalties, it’s always best to hire the services of accountants and bookmakers.

These professionals will ask you to provide information relating to the company, particularly the previous year’s tax return, financial business reports, and tax forms. 

Likewise, you may be required to give information on assets, loans, income and expense records, deductible expenses, payroll data, inventory total, and even stocks and bonds.

They can then create an accurate and up-to-date picture of your business which will prove helpful when preparing and filing your tax returns.

Know How They Work

Many businesses don’t know the ins and outs of sales and use taxes. For this reason, they are frequently audited and fined by tax collection agencies. 

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Employing the services of accountants and bookkeepers will go a long way in streamlining your business’s reporting of these tax categories.

They provide personalized plans to grow your business while they do the heavy lifting with the authorities. 

Start working with one today.