Businesses earn income by business operations, and individuals earn income by doing jobs. Similarly, taxes are the main source of income for government bodies. Public services, legislature, establishment, and all government services available to citizens are funded by the taxes collected from the public and business entities.
Tax is a legal obligation of every citizen and business of a country imposed by the government institutions to support public expenditures. The people or businesses who do not pay tax are charged with heavy penalties and punishments. In short, the policemen available for your help, firefighters and primary healthcare, schools, transportation, road safety, etc., all are possible due to taxes you pay.
Taxes can be basically subdivided into individual taxes and business taxes. However, there is a more practical sub-division of taxes as: earn, buy, and own. The income taxes, corporate and individual, are paid for what you earn. Similarly, sales taxes, gross receipt taxes, VAT, and excise taxes are paid on whatever you buy. Lastly, property taxes, wealth taxes, inheritance taxes, etc., are levied on what you own.
This article is going to about buy taxes that is sales tax. Sales tax is paid by the businesses but charged to consumers by the companies. If there is a 17% sales tax, the company will pay it, but it will be added to the price of whatever you buy.
Taxes For Businesses
Before we jump to sales tax, let’s understand some basic types of business taxes. Business taxes are financial charges that the business entities are legally bound to pay. The most common types of business taxes or corporate taxes are as follow:
- Corporate income tax
- Payroll tax
- Capital gain
- Wealth tax
- Sales tax
- Self-employment taxes
The government levies a consumption tax on sales of goods and services; that is called sales tax. Traditionally, the tax is charged to the consumers purchasing the goods, and tax is added to the retail price of a good. The seller is responsible for collecting tax from the consumers and passing it on to the government.
How Does It Work?
Sales tax is also known as trust tax, as the seller collects the tax from customers and passes it on to the government. According to sales tax regulations,
any business must pay the sales tax as per legal binding by the government if t it has a nexus in a state. The nexus can be defined as a brick-and-mortar store, affiliate, employee, or another kind of presence.
Traditionally, the retail store owners only charge retail sales tax to the consumers or buyers of a good or service. It works like this because the modern supply chains are complex, and goods pass through different stages and players across a supply chain. Each player completes his part of tax documentation to transfer sales tax liability to the liable person or party.
For instance, if we take an example of a leather wallet. The leather wallet you purchase at a store has gone through so many stages. The animal farmer sold the cowhide to a leather manufacturer. He is not the end-user of the product. Therefore, he will need to get a reselling certificate from the government to prove it. The leather goes to the wallet manufacturer.
He will also get a resale certificate. Finally, the retailer selling the wallet in a showcase of his store will be passing the wallet to the end-user. The end-user is the person who either consumes the good, passes it to someone else who is his dependent, or as a gift.
Different sales taxes can be charged on the consumers under different jurisdictions. Many times, these taxes can overlap each other. In the USA, states, counties, and municipalities have their own sales tax. Therefore, it can cause overlapping.
A nexus is defined as a physical presence. However, the condition of physical presence is not limited to a store, office, or warehouse. It extends to the presence of a business representative, employee, affiliate website driving traffic to your main store, etc. The example of affiliate and partner websites is more relevant to eCommerce businesses that are budding in recent years.
Sales Tax Vs. Use Tax
It is very important to understand the difference between sales tax and use tax.
When we talk about sales tax, it is the tax levied on the sale, transfer, or exchange of taxable items or services. The price of a product is adjusted by adding the sales tax to it.
On the other hand,
User tax is a tax imposed on the use, storage, or consumption of taxable goods and services. The user tax is applied on services on which sales tax has not been applied already. It is a complementary charge of a sales tax where sales tax is not applied.
For instance, if Tina buys a car in Florida but belongs to Ohio, she won’t be charged the state sales tax in Florida. Instead, she will pay the use tax in her home state.
How To Calculate Sales Tax?
Let’s come to the question of calculating the sales tax. You can find many online sales tax calculators. However, you won’t get a concrete understanding of how the sales taxes are calculated.
The simplest formula for sales tax calculation is as follow:
Sales Tax = Total Sales Of The Business X Sales Tax Rate
If a business store owners want to find how much sales tax he should charge to the customer, multiply the customer bill by the sales tax rate.
Example Of An Online eCommerce Store
Let’s comprehend the concept with an example of an online eCommerce store. The sales tax difference in online business is that you have to figure out the sales tax amount.
As an online eCommerce store, you will first figure out if you will charge the sales tax rate of the buyer’s state. Once determined, you have to find out the sales tax rates in the buyer’s state.
In the United States, there are over 10,000 sales tax jurisdictions. The sales tax rate an online retailer charges to the customer depend on the buyer’s location(shipping address). Let’s say Atlanta, GA, sales tax rate is 8.9% if you’re within city limits. However, if you’re outside city limits, the sales tax reduces to 7%.
The sales tax a business will charge to its customer will be a combination of different taxes. It will be a collective tax of state, county, and city. In the above example, 8.9% is the total tax after combining all three taxes.
Let’s take the example of an online garments store. The seller is required to find the sales tax on the total customer bill of 500 USD. The shipping address of the customer is Atlanta, outside the city limits.
The state sales tax of Georgia is 4%, Fulton County’s sales tax is 3%. Since the shipping address is outside the city limits, 1.9% sales tax of Atlanta city will not be charged.
The sales tax of the total bill will be as follow:
Sales Tax = Total Bill X Sales Tax Rate
Sales Tax = 500 X 7%
Sales Tax = 35 USD.
The total bill of the customer will be PRICE PLUS SALES TAX. It will be equal to 535 USD.
When Does A Business Not Collect Sales Tax?
A business will not need to collect the sales tax on sale receipts in the following cases:
- The business operates in a state of the US where sales tax is not imposed on goods and services.
- If a business operates in a state that provides tax holidays, for example, a weekend or day when consumers can do tax-free shopping, the seller will not collect tax.
- The item you’re selling is exempt from sales tax.
- If you’re in the business of reselling unfinished or semi-finished goods to other businesses, you won’t collect sales tax.
What Goods Are Exempt From Sales Tax?
In all states of the US, some certain goods and services are exempt from sales tax. These goods and services include:
- Necessities like food, medicine, clothing
- Healthcare and educational goods
- Products sold to resellers
If we talk about New York, the following goods and services are exempt from sales tax:
- Prescription drug
- Non-Prescription Drug
Which States of the US do not charge sales tax?
Some states in the United States do not impose a sales tax on the products or services sold within the state boundaries. The sales-tax exempt states include:
- New Hampshire
However, there might be local sales taxes in these states too.
Sales tax is an obligation of every consumer and buyer toward the government. However, the businesses selling the products or services have the liability to pass on the sales tax to the respective government bodies. Every business in varying states must comply with sales tax regulations and legal liabilities to avoid penalties and punishments.
This article will have helped you understand the concept of sales tax and its difference from the user tax. We have also covered the sales taxes across states, counties, and cities. Either you have a big store or online eCommerce website, you can calculate the taxes and collect them from the customer to pay back to the government.