Understanding Sales Tax

Just because you are a business owner does not mean you are a tax expert. But it behooves your overall business if you understand some sales tax basics to ensure your business remains tax compliant — especially since it is the business’s responsibility to collect all sales taxes owed to the government.

Sales tax is defined and applied differently in every state in the country.  Its various forms include:

  • Gross Receipts Tax — levied on all sales of a business
  • Excise Tax — levied on certain goods as alcohol or tobacco products
  • Use Tax — levied on items used within a certain county but bought elsewhere
  • Value Added Tax — levied at each stage of production based on the value added to the product at  that stage

The most common sales tax however is the Retail Sales Tax.  It is generally applied as a separate charge, to a sale, based on a percentage imposed by the city, county, state or sometimes a combination of all three that is tied to the geographic location of the business where the sale is made.

One of the problems this presents is to be sure the rate charged is correct for the locale.  Cities in Cook County, IL are an example of the complications that may arise as there are many layers of Retail Sales Tax rates within the different sections of the county.  Some border cities that cross county lines might have two different tax rates in one city.

Unless they have a physical presence in a state, online retailers are exempt from paying sales taxes. And, not surprisingly, record-breaking Cyber Monday sales this year were 22 percent higher than last year, according to Internet research firm comScore. The rise of online shopping may impact future tax legislation because of the negative impact this has for city revenues everywhere.

Tax rates change from time to time and a business owner should always be aware of the current rate for their location.  January 1st is a day when many rate changes occur.

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