If there’s one thing almost all of us can agree on, it’s that taxes are considered up there with the most boring topics of conversation ever.
You wouldn’t imagine anyone at the Thanksgiving dinner saying, “Oh, I cannot WAIT to discuss the different types of taxes!”
But even still — they’re a necessary topic to talk about, because if you don’t completely understand sales and use taxes, especially if you’re liable to pay them, you will end up throwing money down the drain (or directly shipped to the Department of Revenue).
Having painted such a picture, here’s all that you need to know about sales taxes and use taxes, and the difference between the two. Let’s dive right in!
Key takeaways
- Sales tax is charged on any product/service that someone purchases.
- The sales tax rate is state-specific and differs based on your location.
- Use taxes are conditional sales taxes that apply to products purchased out-of-state where no sales tax was collected.
- You’ll need to apply for nexus to collect sales taxes and remit them.
- You can only register for a sales tax permit if your business meets an economic threshold.
- Filing for nexus usually happens with the Department of Revenue.
- You’ll need to understand your state’s filing requirements before you file for a sales tax return.
Understanding sales taxes
Sales taxes are charged when a customer purchases a product or a service.
For example, if you go to a restaurant to eat a meal, the sales tax included in the bill is charged to you, the customer.
Even in a situation where a product is passed along to multiple, different stakeholders before the end customer gets it, the customer still has to pay the sales tax.
The only catch is the stakeholders dealing with the product are required to have a resale certificate.
For example, when you purchase your favorite shampoo, the manufacturer, the distributor, and the grocery store have all dealt with the same product, but it is you, as the customer (the entity eventually using the product) who will have to pay sales taxes.
As a business owner, you’re responsible for collecting these taxes from your customers and paying them to the government. In the US, states have different percentages of state tax that are applied for every sale.
For example, California has the percentage of sales tax set at 7.5%, Florida at 6%, New York at 4%, Texas at 6.35%, Alabama at 4%, etc.
Only if you reside in Alaska, Delaware, Montana, New Hampshire, and Oregon, you’ll have a sales tax exemption — that means no sales taxes are attached to anything you purchase.
Other situations where no sales taxes would be applicable are if you resell products or if you’re purchasing raw materials (such as yarn) that would be required to make the final product (i.e., clothing item). In some situations and states, sales tax on food and clothing items may also be reduced or exempt.
For example, in Georgia, sales tax does not apply to groceries in all cities, except Cherokee County, in which residents have to pay a reduced sales tax of 2% if they purchase items like meat, bread, and produce.
In some parts of the United States, sales tax may also consist of city tax, state tax, county tax, and any other special jurisdictional taxes listed.
For example, Cook County residents in Chicago have to pay 6.25% to the state, 1.25% to the city, 1.75% to the county, and 1% to the regional transport authority, thus ringing up their total to 10.25% in sales tax charged on the original value of the product/service.
Sales taxes are usually generalized into three different categories — namely, retail transaction taxes, vendor privilege taxes, and consumer excise taxes.
Before we move forward with the next section, here’s some small additional information about who has to collect taxes: any company (whether online or offline), regardless of their business location, which has streamlined sales, will need to collect tax payments.
Unless, of course, tax laws don’t apply to your state or your customers have a tax exemption certificate.
What is nexus, and what does it have to do with sales tax?
Nexus refers to a business owner’s legal responsibility to collect tax payment from the end user and give it to the government.
So, “sales tax nexus” defines the relationship between the business owner and the government, which will allow them to carry out this obligation.
Until you establish a sales tax nexus with the local government (search the applicable .gov website for your city or state, usually associated with the Department of Revenue where you live), you cannot collect tax due from someone on retail sales and taxable services.
First, you’ll need to determine if your business meets the current economic or physical nexus threshold (which is usually $100,000 in sales or more), and then apply for the nexus to be registered.
There are different types of nexus you might get categorized in, such as marketplace nexus (which applies to marketplace facilitators who offer online services), economic nexus (which applies to out-of-state businesses), and click-through nexus (which applies to all qualifying business providers who meet the threshold).
Please note that while you typically need an office or a warehouse to apply for nexus, you can also apply for it in a particular state if your employee(s), a business partner, or an affiliate of your business stays there.
What is use tax?
Use tax is a type of conditional sales tax, where taxing responsibility falls on the person purchasing the product and not the business owner (like it usually or otherwise would).
This is why it’s also known as consumer use tax.
Use taxes typically only apply on purchases that are done by out-of-state customers whose home residence charges a tax rate on a specific item, but the place they are purchasing from does not have state sales tax.
For example, if someone from New York, where state sales tax applies, purchases a tangible personal property (like a motor vehicle) from Alaska, where sales taxes do not apply, they will not be charged a sales tax in Alaska, but they will have to pay a use tax instead.
Use taxes are usually the same amount as sales tax in your county or state. For example, if the NYC sales tax is 4%, then the use tax would be the same percentage, too.
This distinction between sales and use taxes mainly happens so that a customer does not end up paying double the amount of their tax liability.
The other benefit of use taxes is that it does not end up giving local businesses serious competition.
In practice, because use taxes are difficult to enforce, they only apply to larger purchases.
Sales tax vs. use tax: Understanding the similarities and differences
Before we begin discussing the differences between sales and use taxes, let’s first touch upon the similarities.
- The use tax rate is the same as the local sales tax rate.
- Both taxes apply to remote sellers and in-person businesses.
- Both are applicable to all kinds of goods and services.
- Eventually, both kinds of taxes have to come out of the end user’s pocket.
Now that we have the basics covered let’s elaborate on the differences:
| Sales Tax | Use Tax |
|---|---|
| When it comes to sales taxes, the business owner is responsible for tax collection and tax filing. | As far as use taxes are concerned, the taxpayer (aka, the person purchasing the product) has to pay it to the local government. |
| Sales taxes are typically easier to enforce. | Because use taxes have many kinds of out-of-state technicalities involved and the responsibility eventually falls on the end user, they become more difficult with respect to enforcement. |
| Sales taxes only apply to in-state and online businesses. | Use taxes apply to out-of-state and online businesses. |
| Both sales and use taxes are applied to secure funding for in-state budget items. | Aside from securing funding, use taxes have other benefits, too, such as protecting local businesses and not making the taxpayer pay twice. |
How to collect sales taxes for your business
Now that we’ve covered the bulk of the importance of sales and use taxes, let’s jump to the meatier bits, like how to collect sales taxes for your business.
Find out if your business meets the economic threshold
Find out if your business meets the economic threshold to apply for nexus.
While most states agree you will need to apply for it if your business does more than $100,000 in sales, this rule does not apply to every state.
For example, some states may have sales tax exemptions, some may have a higher threshold, and some may have no threshold at all.
You’ll need to check in with your local government to understand the tax guide. Here’s another resource that can help: Nexus State Guide.
File your permit application
Once you know you need to apply for nexus, file your permit application with your state’s Department of Revenue (or other business tax authority).
And if you deliver out-of-state, you might need to ask for a use tax permit too.
Find out what your tax return responsibilities are
Typically, at this stage, you will need to find out from the tax filing authority what your tax return and tax collection responsibilities are.
For example, some states use a blanket tax for all goods and services, whereas others often charge a different tax rate for different things.
Keep a streamlined process to collect taxes
Once everything is said and done, you will need to keep a streamlined process to collect taxes.
This is where a solution like PandaDoc can help you manage all your tax forms and accounting documents.
How to remit sales taxes
Before you begin remitting sales taxes, you’ll first need to figure out the filing due date, frequency, and requirements (for example, some states may just ask you to disclose the total, whereas others will request that you provide a step-by-step breakdown).
Once you identify what is needed on your end, you’ll need to get a sales tax return form to disclose what you made in sales taxes that calendar year.
Some states may require you to file a sales tax return even if your business was inactive that year.
File your taxes fast, the right way
Taxes are a huge responsibility that requires you to spend so much of your time calculating and disclosing them. Do you want to allocate even more of your time filing them?
Well, these days, many states allow users to e-file their tax returns, and solutions like PandaDoc help you manage these documents and help you file them effortlessly.
For example, you can use our software to sign sales tax return forms, manage your tax documents, and even notarize your returns.
To understand the extent of PandaDoc’s capabilities, book a free 15-minute demo!
Disclaimer
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