February always brings to mind hearts, flowers, love and passion. Business owners usually start a business when they are passionate about what they are doing.For example, you love baking, so you open a bakery. You love working with your hands, laying tile or installing cabinets, so you become a contractor. You want to support your family, you enjoy nice things, and you have an idea about how to make money, so you open a business. Whatever the reason, every business owner has a story about why they hung out their shingle.
The problem always seems to be those pesky things that come along with opening a business that you don’t know about until you are in it. Few people consider issues like marketing, payroll taxes, HR, lines of credit and my personal favorite, sales tax. Some people view these things with annoyance, as if their sole purpose is to take you away from focusing on making the perfect gluten free chocolate cake or designing a pink peony masterpiece.
But every business owner knows that running a successful business is not all rainbows and hearts. It is hard work. And understanding how sales tax affects your business is just one part of it. The first step to mastering sales tax is to understand how the Comptroller’s Office or Department of Revenue classifies your business. Are you a retailer? Are you a manufacturer, which may entitle you to some manufacturing sales tax exemptions? Are you a contractor or a taxable service provider? Does your line of business have multiple classifications, i.e. are you a contractor who sells parts and rents equipment? You must understand your business and what laws affect it.
Once you have determined your classification, you need to know the taxability of what you are selling, the service you are performing or both. Are you selling something that is taxable? Are there instances where customers can purchase these items or services tax free? If so, what documentation do you need to support the tax-free treatment of the sale? If the products or services are taxable, what tax rate should you charge? Is freight, shipping and handling taxable? Understanding when to charge sales tax, and the documentation needed if you don’t, is something every business owner needs to know.
While businesses typically focus on collecting sales tax, they also need to focus on paying sales or use tax on purchases. Almost every jurisdiction has use tax. This is a mechanism for taxing authorities to require the consumer to pay tax, even if the vendor does not charge sales tax. When you make purchases for your business, you must know if use tax is due as well as how to calculate use tax.
It can all seem intimidating. But remember, you didn’t master laying mosaic tile the first time you tried. And maybe that gluten free chocolate cake tasted like paste the first few times you baked it. But eventually, you got it. Sales tax is just like that. You should take the time to learn how it affects your business.
You also must know when to bring in someone to help you. When I have a leaky pipe, I don’t grab a wrench and fix it. I call a plumber. Some people, with a little research, can fix it themselves. The important thing is that the pipe stops leaking. Whether you research the issue yourself or hire someone to help you, make sure that your sales and use tax issues are addressed properly.
A good, thorough understanding of sales and use tax will enable you to follow your passion without worrying about your taxing authority finding something in an audit. Take the time to understand or find someone who understands sales tax and how it affects your business. Who wants to work hard and owe money to a taxing authority instead of taking that money home? Plus, there may be sales tax exemptions available to you, depending on your business and jurisdiction of operation. So, show sales tax a little love (or at least don’t be a hater).
Thomas, Thomas and Thomas, PC