Sales tax is a tax you pay on retail goods and services. Sales taxes are known as point-of-sale taxes because they are collected by the merchant or retailer when a sale occurs and then passed on to the governing jurisdiction. It sounds simple, but it can get quite complex. Indeed, in many instances, businesses may find they have more questions about the state sales taxes they’re collecting from customers than the state income taxes they’re withholding from their employees.
First, even within one state, there can be many jurisdictions, as various municipalities can collect a local sales tax in addition to the state tax. And the list of special taxes and exemptions can be enormous: Typically, essential items such as food and prescription medication aren’t hit with a sales tax. On other hand, sales tax on items such as alcohol and tobacco may be higher than other items to discourage use of those products.
And that’s just the beginning. What if you sell a mix of taxable and nontaxable items? Let’s take a look at New York, for example. As the state explains with an example in a technical bulletin, issues crop up when you sell a mix of taxable and nontaxable items, such as when a fictitious company sells a gift set containing a cutting board, knife and several cheeses for $15. Even though cheeses are not taxable in New York, in this scenario, since the items are not sold separately, the entire $15 is subject to sales tax.
But if the items are sold separately for consumers to assemble their own gift package, then the cheese, priced independently of the board and knife, is sales tax-free.
And this is just New York — there are 44 other states that may have a different take on this!
Crossing the Borders
Companies can run into even more complexities when their sales cross jurisdictions. The difficulties of Nexuses and the issue of whom you’re selling your products to can get very tangled, so it pays to get professional advice.
For example, will wholesalers run into problems shipping goods to retail outlets for resale all over the country? Maybe not. In general, states impose sales tax on retail sales only. Typically, a wholesaler that is only selling products for resale — not to end users — obtains a resale certificate, which relieves it of its sales tax obligations. So let’s say a wholesaler ships the aforementioned boards and knives to gift stores all over the country: The retailers have the responsibility for collecting the sales tax in their jurisdictions, but the wholesaler doesn’t have to collect from the individual stores. However, as with so many regulations, there are special situations that can create taxable events.
Even this brief discussion shows all the issues and potential pitfalls surrounding the sales tax. Give me a call to discuss your situation, so we can be sure you’re on track for accurate sales tax collections and reporting.
We welcome the opportunity to put our small business expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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