What Is a VAT Deduction and How Do You Claim It?

In the United States, businesses operate under a sales tax system administered by state and local governments. This consumption tax is applied to the sale of goods and services and is charged once at the final point of sale to the consumer. A business’s primary role is to collect this tax from customers on taxable sales and remit it to the proper tax authority.

While businesses pay sales tax on their operational purchases, an exemption exists for inventory. Businesses do not pay sales tax on goods purchased for resale, which prevents the tax from being applied multiple times to the same product.

How Businesses Handle Sales Tax on Purchases

A business must register with the state tax authority to obtain a seller’s permit or certificate of authority. This registration is required for any business that sells taxable goods or services and allows it to legally collect sales tax. The primary way a business avoids paying sales tax on its purchases is by using a resale certificate.

When a registered business buys goods it plans to resell, it can provide its supplier with a resale certificate. This document certifies the purchase is for resale and exempts the transaction from sales tax. For example, if a business owner buys a computer for store operations, they will pay sales tax, but if they buy the same computer to sell, they can use a resale certificate to purchase it tax-free.

Common Business Purchases and Sales Tax

Goods for Resale

The most common category of tax-exempt business purchases is inventory. Whether it’s raw materials for a manufacturer or finished products for a retailer, items that will become part of a final product sold to a customer can be purchased tax-exempt.

Operational Expenses and Overheads

For most other business expenses, a business pays sales tax just like any other consumer. This includes purchases of office supplies, furniture, computers, and other equipment used to run the business. The sales tax paid on these items is not credited against the sales tax collected from customers. Instead, the sales tax becomes part of the total cost of the item, which may then be deductible as a business expense for income tax purposes.

Documentation and Record-Keeping Requirements

To prove that a purchase was legitimately tax-exempt, a business must maintain proper documentation. The documents are the resale and exemption certificates it provides to its suppliers. Likewise, a business must also collect and keep valid exemption certificates from its own customers who are exempt from paying sales tax, such as other resellers or certain nonprofit organizations.

Accurate records of all sales and purchases are needed. Businesses should keep purchase invoices, receipts, and records of all sales tax collected. While specific requirements vary by state, the IRS advises keeping tax-related records for at least three to four years. This documentation is important in the event of a sales tax audit by a state authority. Without proper records, a business may be held liable for uncollected sales tax, plus penalties and interest.

Collecting and Remitting Sales Tax

A business’s sales tax responsibility is to act as a collection agent for the government. The process begins by calculating the total sales tax collected from customers during a specific reporting period, which can be monthly, quarterly, or annually depending on the state and sales volume. This collected tax is then reported to the state tax authority on a sales tax return.

Most states now require businesses to file these returns and make payments electronically. The return details the total gross sales, separates taxable and non-taxable sales, and states the amount of sales tax due. The business must remit the full amount of the sales tax it collected by the filing deadline. It is illegal to keep any collected sales tax; it must all be paid to the government.