Business Sales Tax

What is Sales Tax?

Sales tax is charged by the state. It is often that state’s largest source of money. It is also their easiest source of money. Here’s why: First, if the IRS (the federal government) comes after someone, they seize everything. The state gets nothing after an asset seizure. Second, states are always answering the feds. If the state gets federal money for roads or education, they have to comply with many guidelines, using that money only how the feds say they can.

Sales tax, however, is 100% the state’s money, no strings attached. The feds can’t touch it.  States are serious about collecting it because they can spend it any way they want.

All but 5 states charge sales tax (Delaware, Alaska, Montana, New Hampshire, and Oregon). However, some localities in these states charge a local tax. So beware, sales tax is everywhere.

How does the State collect Sales Tax?

This is where businesses, like yours, come in. Businesses are required to act as an agent of the state and collect sales tax from their customers. If you started a business and you are selling something taxable, you are now an agent of the state. The state is your boss now. You are collecting their tax money and sending it to them.

You are required to get a permit to collect sales tax from your customers. Then, you are required to do the paperwork and send in the money at the end of the month. If you do not collect the sales tax and send it in on time, they start fining you. 

Remember the scary scenario above where they were collecting sales tax and just keeping it? They failed to get a permit. That’s one fine. They failed to file the paperwork every month. That’s a fine for every month. And they failed to send it into the state on time. That’s another even higher fine every month plus interest. As you can see, not complying with sales tax can get you in a lot of trouble quickly.

Doing it Right

The minute you start your business, you need to check with your state and see if you are selling something subject to sales tax. Some states tax diapers, some don’t. Some tax food, some don’t. In some places, services like lawn care are taxed. Find out if your business should be collecting sales tax. If so, do not hesitate to get a permit from the state. There is usually a fee to get the permit.

Then, start charging sales tax from your very first sale. Be sure you are using some kind of system to record all your sales in one place. You do not want to be wading in a mountain of paper every month trying to figure it out. I have a client that has in-store sales in Square, online sales in PayPal, and festival sales on Clover. What a mess. Have one system that captures all your sales. 

I thought we were friends

What if you hear this? But man, I thought we were friends. You’re getting all official and charging me tax? You can let me slide, right? Wrong. Walk into Big Blue Box Store and try that story with the cashier. Not going to happen. The law applies to a one person plumbing repair service the same as it applies to Big Blue Box.

Is there any upside to this?

Yes, there is. If you get your permit and you collect sales tax properly, and if you file the paperwork every month on time, and if you send in the money you collected on time, you get paid. Really. The state pays you to do their paperwork. If you file and pay on time, you get to keep a little bit of what you collected. Usually about 2%. That isn’t much if you are only collecting a few dollars each month. But as your sales increase, so does the amount you keep.

How do I record it in my bookkeeping?

In a perfect world, you report only your sales as income. The tax you collect should be in a ‘current liability’ or ‘short term liability’ account. When you pay sales tax, it is not an expense, it is paying off the liability. Sales tax collected should never be recorded as income or an expense. Of course, this is a perfect world where we are all accountants. Do you best with bookkeeping and get help when you don’t understand.

 Summary

Always remember, the tax you collect is never your money. It may be sitting in your checking account, but it is not, and never will be, your money. You cannot use it to pay bills. It is the state’s money and they get very upset if their check isn’t on time. When the state gets cranky, they start fining you. They can close your business and take your stuff.

File and pay your sales tax on time every month and get paid by the state.

If you do business in Arkansas, check out this post on Arkansas Sales Tax.

For the next blog in this series – Property tax – Click here