Sales Tax — Is It Really Necessary?

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Twenty-year-old Casey Medlock of Palatka, FL is in the business of making memories – scrapbook memories, that is. She helps people create artistic albums to show off their favorite photos and souvenirs. Scrappies, Casey’s business, is a retail store that sells scrapbooking supplies and gives lessons for $10 and up.

Sales Tax
— Is It Really Necessary?

By Lori B. Murray

A Taxing Issue
When it’s time for Casey to pay sales tax, however, even the best memory won’t help. Like all business owners, she must keep careful records of her business transactions in order to know how much sales tax she owes.

Almost all states require businesses that sell tangible products directly to the public to collect sales tax from their customers and pay that sales tax to the state. Before Casey opened Scrappies, she had to get a certificate of resale (also known as a sales tax permit or seller’s permit). Casey filled out the required form that she got at the county courthouse and paid $30.

Because Casey has a certificate of resale, she does not have to pay sales tax on items she purchases to sell in her shop. She simply gives the supplier a copy of her resale certificate, thereby showing that she is taking the responsibility to collect the sales tax from her customers.

Casey's Record-Keeping System
Casey averages quarterly sales of about $7,000. That’s a lot of receipts to keep straight for figuring sales tax. "Every day I total the receipts, staple them together, and write the total on the back," she says. "At the end of the quarter, I add them up, calculate the sales tax, fill out my report, and send in the money."

It sounds simple, and it is, says Casey, if you keep good daily records and keep the tax money in a separate account. Don’t let the sales tax money mix with your regular operating capital, she warns.

As Casey’s business grows, she will also need a system for tracking non-taxable sales, such as sales to non-profit organizations or mail order sales to customers in other states. Shipping and handling is also non-taxable in most states.

Avoiding Tax Problems
Javier Ortiz, a 16-year-old ’trep in Edna, TX, agrees with Casey about the importance of keeping accurate records. Javier buys gift items – candles, picture frames, and home-decorating products – at a wholesale outlet, and sells them to retail customers. Since he has a low volume of sales, he is allowed to pay sales tax annually instead of quarterly.

"I have a notebook where I keep a record of all the sales tax amounts I’ve charged," he says. "I keep my notebook in a box. Every time I charge sales tax, I count the money and put it in the box as well. That way, there is no temptation to use the money for something else," he says.

A year is a long time though, and Javier warns that it can be hard to keep track of taxes when things get busy. He advises anyone in business to maintain careful records, keep all sales receipts, and double-check math.

Getting Started
Before Javier started doing business, he took a class on entrepreneurship. His teacher helped him fill out the paperwork for his sales tax permit. Since he is still a minor, his mother co-signed the application.

Every state has different sales tax regulations. Adding to the confusion, most cities charge sales tax as well. It is very important to know the tax regulations, what items are subject to sales tax, and the tax rates for every business location you establish. Often, city and state sales tax rates are combined into one tax rate, and the money is collected by one government agency.

If you think this whole process sounds like work – you’re right. Remember, though, the people who work for the tax agencies are used to answering questions. They will gladly provide brochures, handouts, sample tax forms, and sales tax rate charts to make your "taxing" job easier.

Full Speed Ahead
Casey and Javier don’t let the sales tax process slow them down. In fact, Casey is moving full speed ahead with the expansion of her store from 500 to 1,000 square feet, so that she can carry a larger inventory. She eventually wants to own a storefront or even start a chain of stores.

Javier is equally as ambitious. "I like meeting people, talking to customers, and making money," he says. He especially likes setting his own work hours, and thinks more teens should give entrepreneurship a try. As you can see, Javier and Casey aren’t letting a little "headache" like sales tax keep them from building a future in business!

Do I Need to Collect Sales Tax?
Every business that sells tangible goods that are subject to its state and/or city retail sales tax must obtain a resale certificate (or seller’s permit), collect sales tax, file sales tax reports with payment of taxes collected, and maintain records of all transactions. In some states, it is a criminal offense to sell goods without a seller’s permit. However, a business may not be required to collect sales tax on goods that are shipped out of state.

A business can sell goods to a buyer without collecting sales tax if the buyer plans to collect sales tax when the goods are sold to a retail customer. To be exempt from sales tax, the buyer must present a copy of his or her resale certificate to the seller. However, if the buyer then uses the goods (other than for display or inventory), rather than selling them, he or she may owe a "use" tax to the state.

Resale certificates may be revoked for failure to file sales tax returns on time or to pay taxes due. Sales tax is normally paid monthly, quarterly, or annually, depending on your level of business activity.

A good place to start researching sales tax rules that apply to your business is The Sales Tax Clearinghouse, where you will find a table listing the tax rates, exemptions, and Web page addresses for every state. You should consult a tax professional such as a certified public accountant (CPA) to determine your company’s sales tax responsibilities for the states where you do business.