Okay.
So what are sales and use tax and why is that important to consider for the business?
Well if you sell goods within a state that state may put a sales tax on the sale of those
goods.
And that sales taxes is paid by the purchaser or the customer.
And it is collected by the merchant, the individual sale on those goods and transmitted to the
state and such.
Some states do not have sales taxes.
Well I think actually most states have a sales tax.
But you have to check your local state – state rules to see if there is a sales tax.
And the sales tax rate changes from state to state generally somewhere between 4 and
8 percent of the value of the good sold.
And there will be additional taxes sometimes for certain items like alcohol, forearms,
tobacco, things like that or luxury goods will have a higher sales tax on it.
And there will also be local sales taxes sometimes as well which you'll have to again collect
that money and send to a locality or it could be that you designate the locality.
You send it to the state department or revenue.
And then it goes back to the locality from the department of revenue.
So it makes the reporting process easier.
So that’s sales tax, right?
And you generally have to get a state sales tax identification number if you're a merchant
selling these goods and you have to collect sales tax for these goods.
So just like the employer identification number you go to the state department revenue.
And there is a form and procedure in place for you to get a sales tax identification
number.
This sales tax ID number will also be important for ordering merchandise that you're going
to resale because it will exempt you from sales tax from purchasing those goods, right?
The – so you get that exemption there because you're not the ultimate in consumer, right?
So it's only the in consumer or purchaser that pays – pays the sales tax on those
goods.
And then there is a related concept called use tax.
Now we just talked about the context of you buying goods for resale.
Well in some cases you may purchase equipment, et cetera, goods to use within the business.
Now if you're the consumer or use it within the business you will likely have to pay sales
tax on those items.
So say you go out of state and you purchase a vehicle and the sales tax rate for the vehicle
is 6 percent where in your current state it was 7 percent.
And you bring that piece of equipment back to the state and use it in that state to carry
on activity.
Well in that case the state will say well you avoided paying our sales tax percentage
and went to another state.
In order to disincentivize or remove the incentive to do that we will charge you the difference
so you have a 1 percent obligation to your local state to make up the difference between
the sales tax rates between the state.
So that’s called use tax when you purchase something out of state at a lower sales tax
rate to use in business in this state supposed to pay the use tax to the state.
Now a popular issue now that is – that has come up internet sales et cetera.
Do you have to charge a sales tax on the internet sales?
Generally the question is determined by whether you have a significant presence in the state
where you made the sale, okay?
If you have sales agents, a place of business, your registered to do business there, distribution
outlets, anything like that in a state if you earn revenue by selling a good there then
you have enough presence in the state that state can charge you sales tax.
But if you're like lots of internet companies where you simply take the order online and
then you ship that order to the consumer in another state or you don’t have a significant
presence in that state.
so you're not subject to sales tax.
Now different states have different rules on that.
But again the backdrop is you have to have different rules on that.
But again the backdrop is you have to have minimum contacts, minimum business operations
or some form of minimum contacts with the state where there's constitutionally justifiable
for that state to impose a tax on the sale of your good within that state.
Amazon is the largest example where it is running into that in many states where it
is developing distribution centers within the state where previously had no physical
presence or very little physical presence and by developing those distributions sites
they now have to charge sales tax to consumers in that state.
Now often states grants us specific exemptions for starting online retailers that say okay
we are exempting you any sales.
You do not have to charge sales tax on it even though you do have physical presence
in the state.
Now that is just a product of bargaining power by the organization.
But generally for your start up business if you have a physical presence in that state
you will need to have a method in place to charge sales tax to the customers who purchase
your products, okay?
On a related note if you provide services you do not charge sales tax on services, okay?
If there are – the transfer or sale of goods incidental to the services, if you're not
making any profit on that you may not qualify to have to collect the sales tax on that.
but if you're making any form of profit for the sale of goods along with your services
yes, then again you would need a sales tax identification number.
And you would need to collect the sales tax from the individual purchasing the goods,
okay?
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