Determining Sales Tax In Business

July 17, 2014

Written by Tasha

The stress of tax season might be over for the US but having continual knowledge of tax information is important. A couple of weeks ago, a friend of mine was asking me several questions as she began to embark on her journey to launch her business. She mentioned how overwhelmed she was by taxes and what she needed to do.

Honestly when I launched I had those same questions and felt just as overwhelmed. Know that you’re not alone when it comes to determining your sales tax in business or other tax information you must know for your small business to run smoothly.

There are different kinds of taxes when it comes to business and they all differ from state to state. There are also tax breaks and much more. First, let’s define what sales tax in business is.

Treat any sales tax you pay on a service, on the purchase, or use of property as part of the cost of the service or property. If the service, the cost, or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. If the property is depreciated, add the sales tax to the basis for depreciation. via IRS

That definition comes from the irs.gov website. They are the authority on taxes and much more when it comes to your money and more. The IRS even has a Tax Guide For Small Business Publication 334 (2013)

In layman’s terms sales tax is what you charge your customers or clients in the STATE YOUR COMPANY has a PHYSICAL presence.

Here are some frequently asked questions when it comes to sales tax. (please note this is based on Texas) you can go to your state website and pull up the same information.

1. What is taxable? Texas tax law refers to tangible personal property and taxable services as taxable items. Each sale of a taxable item is taxable unless a specific exemption applies.

2. How much sales tax do I collect from my customers? You should calculate the amount of sales tax by multiplying the tax rate by the sales price of the taxable item.

Sales tax = sales price of a taxable item multiplied by the tax rate.

3. How do I know which tax rate to use? Texas sales & tax rate is 6.25%, but local taxing jurisdictions may also impose sales and tax up to 2% for a total maximum combined rate of 8.25%. You will be required to collect both state and local sales tax.

4. Am I required to separately state the sales tax amount to my customers? Yes. You must separately state the sales tax amount on your invoice or receipt unless you provide a written statement to the customer that the sales price includes sales tax.

5. If I do not collect the sales tax or collect an incorrect amount, who is responsible for paying sales tax to the Comptroller’s office? As a seller, you are responsible for collecting and remitting the correct amount to the Comptroller’s office. If you do not collect and remit the correct amount, you can owe an additional tax plus you may be assessed penalties and interest.

All the frequently asked questions above can be found on the Texas State website if you want to read more.

If you are still slightly confused when it comes to determining sales tax in business you can check out these books which were extremely helpful to me when I first launched.