Sales Tax: What You Don’t Know May Cost You

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August 01, 2016

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If you fail to properly collect or report sales tax you could face sizable fines or even prosecution. Many states and localities require collection of a sales tax. As a small business owner it is your responsibility to understand the sales tax laws that apply to your business. This article provides a general outline of the policies that govern sales tax. Contact your LegalShield provider law firm if you have questions or need additional information on the state and local laws that apply to your business.


? Generally, you only need to collect sales taxes in states and localities where your business has a physical location. A warehouse, fulfillment center, employees and office space (including a home based office) may all be considered a physical presence in a state. If you ship an item to a customer in a state where you do not have a physical presence you are generally not responsible for collecting sales tax.


? State and local governments regulate sales tax. This can be particularly confusing for businesses operating in multiple states or localities. Some states, like Delaware, require no sales taxes, while other states have tax rates ranging from 4% to 8.75%. Birmingham, Alabama, has a combined state and local sales tax rate of 10%, the highest in the nation.


? Some states require you to obtain a permit before collecting sales tax. Collecting sales tax without a permit in those states could land you in hot water. The Small Business Administration offers a useful list of state specific tax links. Carefully review the information for any states where your business is located.


? Municipal sales taxes may apply to specific kinds of businesses like restaurants, bars and hotels. It is important to know the tax laws in all localities where your business has a physical location.


? There are some general exemptions to sales tax. In some states non-profit organizations are not required to pay sales tax on their purchases. Retailers must track sales to nonprofits and obtain verification of their tax-exempt status. Wholesale purchases, items bought in bulk to be resold, are generally exempt from sales tax. Raw materials that will be used in manufacturing are also generally exempt from sales tax.


? It is important to keep thorough records of your sales and tax collections. Most states and localities require you turn over the taxes you collect monthly or quarterly. You will generally need to file a special return reporting the taxes you collected and all of your sales, including sales that were not taxed."

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