All kinds of businesses are dependent on two fundamental elements- selling and purchasing products and services. Whether you run a retail business, a wholesale, or e-commerce one- the principle is the same, though the tax you will be paid may be different. The sales tax on wholesale items, retail items as well as online purchases is different from each other owing to the different policies that are implemented on them. If you are new to the business and just taking baby steps into this world, you may not be familiar with all the terminologies and the different policies and legalities associated with it. This in turn can affect your business adversely. Hence, it is important to be aware of these things from the very beginning. Understanding sales tax, the advantages, and drawbacks associated with it and more importantly how to calculate the accurate sales tax that can be imposed on your products can help you immensely to prosper in your business.
Where does sales tax go?
It is very important to understand why you are paying a certain tax and where is it supposed to go. The need to collect sales tax in a specific state or country depends on the rules set by the nexus of the region. Nexus is the link between the jurisdiction that decides the tax amount and the business. This means, if your state or country does not have any rule related to sales tax in the region, you may not have to pay it at all and your state cannot force you to register for sales tax deduction either. However, if you are operating as a business in different states, it is very important that you comply according to the individual rules of the states. In other words, even if you are not bound to pay sales tax in one state, in case the other locations have a nexus that makes sales tax mandatory, you have to register and pay it according to the local rates.
Understand how the nexus is established
In order to understand the extent to which sales tasks can affect your business, you must first understand how the nexus is established. The nexus can be based on physical presence as well as virtual presence now. This means, the nexus of a state can make a business pay the sales tax for any kind of physical presence in the location but not if the company do not have such a presence there.
The physical presence of a business is not just about having a brick and mortar store in the location but there are several other instances as well which will be considered as of same value:
- Conducting business through an employee or representative for even one day in Texas or Colorado is considered as physical presence by the nexus of the state.
- More than two days a year in Arizona is also considered as a physical presence.
- In the case of Minnesota, at the least 4 days and more is considered as the physical presence of a business in the location.
- Often having affiliation with another in the state business is also considered physical presence.
- Having links on the websites and online businesses operated by any local business or click-through procedure is considered under click-through nexus and sales tax will be applicable.
Calculation of the sales tax
To make sure that you are paying the correct amount of sales tax as per the rule of the location, you must use an accurate sales tax calculator for the same. Depending on the policies related to the tax, there are different rules accordingly and the calculators are also formulated as per the policies. Hence when you are going to calculate the state’s sales tax, it is important that the state sales tax calculator of the specific region is being used. This way you will be able to detect whether you are paying more or less or the exact due amount. Do note that when you are paying the sales tax, if you are not doing so accurately, you may be liable to fine which is not desirable.
Since the sales tax fluctuates from one region to another, the effect it will have on your business is also variable depending on the regions where you are operating.