A Review of Your Indirect Business Tax Obligations

Indirect business taxes are levied on goods and services and are ultimately paid by the end consumer. The business acts as an intermediary, collecting the tax from customers during a transaction and then remitting the collected funds to the appropriate government agency. The defining characteristic of an indirect tax is that its burden can be shifted, as the business recovers the tax by including it in the price of its products or services.

This model contrasts with direct taxes, such as corporate income tax, which are levied on a company’s profits and cannot be passed to another entity. While direct taxes are calculated based on earnings, indirect tax obligations are triggered by sales and consumption. A business’s responsibility is to accurately collect the tax from the final buyer and manage its remittance.

Common Types of Indirect Business Taxes

Sales and Use Tax

Sales tax is a consumption tax imposed on the sale of goods and services, collected by the seller from the consumer. The complementary use tax applies when purchasing taxable items from out-of-state sellers who do not collect sales tax. In these cases, the purchaser is responsible for remitting the use tax directly to their state’s taxing authority.

The applicability of sales tax extends to a wide array of goods and a growing list of services. Exemptions often apply to necessities like groceries and prescription drugs, though the specific exemptions vary significantly between jurisdictions.

Excise Tax

Excise taxes are levied on specific goods, services, or activities and are often included in the product’s price. These can be imposed at the federal, state, and local levels. Common examples include gasoline, tobacco products, and alcoholic beverages, with the tax amount typically being a flat rate per unit.

The purpose of excise taxes is to generate revenue and discourage the consumption of certain products or to fund specific public services. For instance, federal excise taxes on gasoline help fund the Highway Trust Fund.

Value-Added Tax

A Value-Added Tax (VAT) is a consumption tax placed on a product or service whenever value is added at each stage of the supply chain. While the United States does not have a federal VAT, it is used in over 160 countries, making it relevant for businesses in international trade. Businesses collect VAT on sales and receive credits for VAT paid on purchases, so the tax is ultimately paid by the final consumer.

Customs Duties and Tariffs

Customs duties, also known as tariffs, are taxes imposed on goods transported across international borders. The purpose of these duties is to protect a country’s economy and control the flow of goods. These taxes are levied on imported goods and paid by the importer of record. The amount of duty owed depends on the value of the goods, their country of origin, and their classification under the Harmonized Tariff Schedule, which provides the applicable tariff rates.

Gross Receipts Tax

A Gross Receipts Tax (GRT) is levied on a business’s total revenues, without deductions for its costs or other expenses. Unlike corporate income tax, which is based on profitability, GRT is calculated on a company’s total sales. This means a business could owe GRT even if it operates at a net loss. A few states impose a GRT, and because it is applied to total revenue, the tax can have a significant impact on high-volume, low-margin businesses.

Determining Your Business’s Tax Obligations

A business must collect and remit indirect taxes in any jurisdiction where it has “nexus,” a connection between the business and the taxing authority. Determining where nexus exists is a foundational step before registering for tax permits. The rules defining nexus have evolved to include economic and virtual connections, requiring a review of a company’s activities across all states where it has customers or a business presence.

Physical Presence Nexus

The traditional standard for creating a tax obligation is physical presence. This connection is established when a business has a tangible footprint within a state, such as owning or leasing an office, warehouse, or store. Having employees who work from home or salespeople who solicit orders within a state also establishes this type of nexus. Storing inventory in a third-party fulfillment center or sending representatives to perform installation or repair services can also be sufficient to establish a physical link.

Economic Nexus

Economic nexus, solidified by the 2018 Supreme Court decision in South Dakota v. Wayfair, allows states to require out-of-state sellers to collect sales tax even if they have no physical presence. The obligation is based on the seller’s economic activity within that state. Economic nexus is triggered when a business exceeds a state’s sales revenue threshold, commonly $100,000. Businesses that sell online must monitor their sales activity in every state to determine if they have met the applicable thresholds.

Other Forms of Nexus

Beyond physical and economic connections, other relationships can create a tax obligation. Rules like “click-through” and “affiliate” nexus still exist in some states, though their relevance has diminished since the adoption of economic nexus. Click-through nexus can be triggered by customer referrals from an in-state website link. Affiliate nexus may apply if a business has a relationship with an affiliated company that has a physical presence in the state. While many states have repealed these laws, they have not been universally eliminated.

Information and Documents Needed for Registration

Before a business can begin registering with a state’s tax agency, it must gather a specific set of information and documents. Having all necessary details on hand prevents delays and potential errors. The information required is generally consistent across most state revenue departments and forms the basis of the registration application, allowing the state to properly classify and track the new taxpayer account.

Required Business Information

To complete a tax permit application, a business will need to provide several key details.

• Federal Employer Identification Number (EIN)
• Legal business name and any “Doing Business As” (DBA) or trade names
• Physical and mailing addresses
• A detailed description of business activities
• Corporate structure (sole proprietorship, partnership, LLC, corporation)
• Names, addresses, and Social Security numbers of owners, partners, or corporate officers
• An estimate of expected taxable sales to determine filing frequency

Necessary Documentation

While many registrations can be completed online without uploading documents, it is prudent to have them available.

• Articles of Incorporation or Articles of Organization
• A copy of the business’s federal EIN confirmation letter (Form SS-4)
• Bank account information, including routing and account numbers for electronic payments
• Copies of driver’s licenses for principal owners or officers to verify identity

Obtaining and Completing the Application

Official applications for tax permits are found on the websites of each state’s Department of Revenue. Businesses should use the official government portal to avoid third-party services that may charge unnecessary fees. When filling out the form, the EIN and legal business name must match IRS records exactly. The description of business activities should be specific, as this can influence whether the state identifies other tax obligations. After submission, the review process can take anywhere from a few days to several weeks.

The Collection and Remittance Process

Once a business has registered and received its tax permit, it must begin the ongoing cycle of tax collection and remittance. This operational phase requires systematic procedures to ensure compliance. The process involves accurately calculating taxes on each transaction, filing periodic returns, and submitting the collected funds to the government on time. Failure to properly collect or remit taxes can lead to significant penalties and interest charges.

Step 1: Calculation and Collection

The first step is to correctly calculate and collect the tax at the point of sale. This requires identifying which products or services are taxable in the jurisdiction where the sale occurs. Businesses must apply the correct tax rate, which can be a combination of state, county, and city rates. To manage this, many businesses use automated tax software that integrates with their e-commerce platform. This software uses the customer’s address to determine the precise tax rate and applies it to taxable items.

Step 2: Filing the Tax Return

After collecting taxes, the next step is to report the total sales and tax collected by filing a tax return. The state assigns a filing frequency—monthly, quarterly, or annually—based on the business’s sales volume. The tax return form requires the business to report its total gross sales, non-taxable sales, and taxable sales for the period. Most states mandate that these returns be filed electronically through their online portal by strict deadlines. Filing a return, even if no tax was collected, is usually required to maintain an active account.

Step 3: Submitting the Payment

Concurrent with filing the tax return, the business must remit the total tax it collected. These funds are held in trust for the state and are not the property of the business. The most common payment method is an electronic funds transfer from the business’s bank account through the state’s online portal. Payments received after the due date are subject to penalties and interest. The payment must exactly match the amount of tax reported as due on the corresponding tax return.

Post-Filing

After filing and paying, the business will receive a confirmation number from the state’s tax agency, which should be saved. Maintaining detailed records of all sales transactions, tax calculations, filed returns, and payment confirmations is a legal requirement. These records provide essential documentation in the event of a future audit.