Paying and Collecting Sales Tax as a Small Business

While the collection of sales tax seems simple in principle, it has become a complex and divisive area of concern for many businesses today. Many states have taken up legislation to require online retailers to pay sales tax in their states whether or not there is an established nexus with the state, and the retailers, not surprisingly, have pushed back. The following will outline the basics of sales tax collection and payment as well as best practices.

What is Sales Tax?

We are all familiar with sales tax as most of us pay it on every transaction we make. Simply put, it is a tax charged on the purchase of goods by state and local governments that is paid by the purchaser. Sales tax, however, has a different meaning for businesses. Sales taxes have the ability to implicate businesses twice — once when supplies or products are purchased either for resale or for supplies and then again when whatever product or service the business produces is sold.

Sales Tax on Wholesale Goods

Many businesses buy from wholesale suppliers as there is often a large scale cost savings and this is usually done without paying sales tax. California, for example, has the highest state sales tax at 7.25% and this does not include any locality tax that may be imposed by each jurisdiction.  On the face of it, this means, even you pay the exact same price of goods from a wholesaler as opposed to a retailer, you are ostensibly saving 7.25% right off the top. However, do not forget that someone somewhere eventually has to pay this tax. Typically, this is paid by the end-user of the product. However, many businesses are deciding to pay sales tax on their wholesale purchases to simplify the tax paying process since, at the end of the day, your business can be held responsible for unpaid taxes.

Sales Tax on Goods Sold in Another State

This is the area of sales tax doctrine that has been creating controversy for a number of years. It is well established that if you have a “nexus” with another state and you sell goods there, you have to pay the appropriate sales tax. A nexus is defined as a presence, meaning a brick and mortar building, a warehouse, an office, or employees in the state. More controversial, however, is if you only send product into a state with no other presence. Generally speaking, this means you do not have to pay sales tax to this jurisdiction. However, part of the current controversy is whether states can require a business to have an agent in the state in order to do business there (which is often a requirement of a state’s long arm statute, which is a law that subjects an out-of-state business to their jurisdiction) and by dint of the agent, the business now has a presence in the state and therefore must pay sales tax. This is a complex and fluid situation so knowing the current answers is of the utmost importance.

Tax Hold Backs

Depending on the jurisdiction, some jurisdictions require monthly or quarterly payments of sales tax to the state or local jurisdiction. This is important to remember, especially in some jurisdictions with high local taxes on restaurants because you may need to hold back some 10 to 15% of your revenue for taxes. There are multiple ways to ensure that this happens but should always be set up formally and in advance with your tax professional or business advisor. The penalties for failing to pay in California on time can be severe.

The landscape of sales tax is incredibly fluid right now. The rise of online businesses has made governments stand up and take notice of revenue that is potentially being squandered. This means that any business needs to be sophisticated and up-to-date on the current law and best practices to ensure compliance. The experts at De Cardenas Law Group have decades of experience behind them helping businesses in San Francisco and Los Angeles navigate the tricky field of sales tax compliance. We have the know-how to guide your business through any situation and circumstance. Give us a call today at (626) 577-6800 (Los Angeles) or 415-590-4869 (San Francisco) or click here to set up your initial consultation to find out what service we can provide to you and your business.