Sales Taxes and your Small Business
Navigating the financial aspects of starting a small business can be perplexing at times. Taxes, in particular, require proper management. Otherwise, you could find yourself having not-so-pleasant conversations with the IRS. The best way to avoid these conversations and safeguard your small or online business is to make sure you have a proper understanding of the laws and processes involved in administering sales tax.
How Sales Tax Works
Unlike some taxes, sales tax is not federally mandated, but rather is handled on the state level. All but six U.S. states currently require vendors to charge sales tax, and even in states without such laws, there may be local requirements that vary between municipalities. For this reason, researching tax-related laws in your area is an important first step in starting your small business. If your plans include an online business, you will need to be prepared to account for all variations of sales tax.
A few types of small businesses are exempt from charging these taxes, although again, some areas may have their own specific ordinances. Unless you produce raw materials, sell on the wholesale level or do business specifically with nonprofits, it is likely you will have to deal with sales tax in some fashion.
Permits and How They apply to an Online Business
Most states require that you obtain a permit before collecting sales tax. If you are starting an online business, though, don’t worry. You are only required to obtain permits for taxes charged to customers in the state where you are physically located.
For example, if you sell nationwide but only have one office located in Oklahoma, you only need to collect sales tax on purchases made by Oklahoma residents. If, however, you were to open a second physical location in Texas, sales tax would then extend to Texas residents, even if the specific item they order ships from your Oklahoma location.
Note that the rate of sales tax is determined by the state from which the order originated, so Oklahoma customers of your online business will pay the going rate in their state, while customers from Texas will be taxed according to Texas laws.
Protect Your Small Business with Proper Filing Procedures
Once you’ve determined applicable tax rates and obtained the necessary permits for your small or online business, your remaining concern is how to file and pay those taxes. Whereas tax filings for individuals generally take place once a year, most small businesses are required to file and pay sales taxes each quarter, although some states will require your small business to pay its sales tax monthly.
Be prepared not only to report sales for which you collected taxes, but also any other sale you have made, including those made to nonprofits or other exempt entities.
Taxes for small businesses really aren’t as complicated as they seem at first glance, especially if you are operating a storefront from a single location. If yours is an online business, circumstances may be a bit more complex, but as long as you are aware of the laws in the states in which you operate, obtain the proper permits, and file at the correct intervals, your business will be on the road to success — and the right side of the IRS.