If I Pay Sales Tax, Do I Have to Charge It?
Clarify your sales tax responsibilities. Understand when your business pays sales tax and when it's required to collect it.
Sales tax is a common but often misunderstood aspect of commerce for both consumers and businesses. The question of whether a business that pays sales tax on its own purchases also needs to charge it to customers is a frequent source of confusion. Understanding the fundamental nature of sales tax and specific state requirements clarifies these scenarios.
The Nature of Sales Tax
Sales tax operates primarily as a consumption tax, meaning it is ultimately paid by the consumer. State and local governments levy this tax on the sale of goods and certain services. While the consumer bears the financial burden, the seller is generally responsible for collecting it at the point of sale. The seller acts as a collection agent for the government, receiving the tax from the customer and remitting it to the appropriate tax authority. The seller’s role is administrative, holding collected funds on behalf of the taxing authority until they are due.
Sales Tax on Business Purchases
Businesses frequently encounter sales tax when acquiring goods and services for their operations. When a business purchases items for its own use, such as office supplies, equipment, furniture, or software subscriptions, it generally acts as the end-user and is therefore subject to sales tax on these acquisitions.
A key distinction arises with inventory or components intended for resale. To prevent sales tax from being levied multiple times, businesses can use a “resale certificate.” This document, also known as a seller’s permit or reseller’s permit in some states, allows a business to purchase goods tax-exempt from suppliers if those goods will be resold or incorporated into products that will be resold. Businesses must register for sales tax in at least one state to use a resale certificate for tax-exempt purchases.
Sales Tax on Customer Sales
Businesses are generally obligated to charge sales tax to their customers when selling taxable goods or services. This obligation is triggered by “sales tax nexus,” which signifies a sufficient connection between a business and a state. Nexus can be established in various ways, including having a physical presence like an office, warehouse, or employees in a state. It can also arise from economic activity, known as economic nexus, where a business exceeds certain sales revenue or transaction volume thresholds within a state, even without a physical presence.
Once nexus is established in a particular state, the business must collect sales tax on taxable sales made to customers in that state. Taxability rules vary widely across states; for instance, certain food items, specific services, or digital products may be exempt or taxed differently depending on the jurisdiction. Businesses must determine the taxability of their offerings in each state where they have nexus.
State Registration and Remittance Requirements
Before a business can collect sales tax from customers, it must register with the relevant state tax authority. This registration process typically involves providing information such as the business’s legal name, address, Federal Employer Identification Number (FEIN) or Social Security Number, and business type. Many states also require an estimate of the business’s sales tax liability. This permit, sometimes called a seller’s permit or certificate of authority, authorizes the business to collect taxes on behalf of the state. The application is generally completed through the state’s department of revenue or equivalent tax agency’s official website.
After registering and collecting sales tax, businesses are required to file sales tax returns and remit the collected funds to the state. States assign a specific filing frequency, such as monthly, quarterly, or annually, which often depends on the volume of sales tax collected by the business; higher sales volumes typically lead to more frequent filing requirements. Returns are commonly submitted through online portals provided by state tax authorities, though paper forms may also be an option. Payment methods typically include electronic funds transfer (EFT) or check. Businesses must report their total taxable sales and the collected sales tax, ensuring the payment is made by the assigned due date to avoid penalties and interest. Even if no sales tax was collected during a reporting period, a “zero return” might still be required.