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Why You Probably DO Have to File a State Sales and Use Tax Return

by Jenn McCabe
August 29, 2018

In our Outsourced Finance and Accounting group, we file a lot of what we call "non-income tax" forms. These are pitfalls for many small businesses, and lots of startups don€™t even know that this kind of tax exists. It's not easy to understand or know when these taxes are applicable, but you can't ignore this stuff!

Non-income tax filing includes sales tax, use tax, personal business property tax, and business license tax.  It can also include excise tax in some states, licensing fees for certain professions, and certain payroll fees.

This post will focus on why you may need to file a return for sales or use tax, but we won't get technical. Suffice it to say that if any of the information might apply to you, you need to follow up on the issue by getting more specific accounting advice.

<>Use Tax

Use tax is paid, filed and treated like sales tax, but is handled by the buyer. If the seller of a good or service doesn't charge you sales tax, you're in charge (get it?) and need to pay use tax.  You must determine the local rate of tax―where you are―and file a use tax return.

  • For a business - If you buy assets like office furniture or a computer online, for example, you need to pay use tax. How will the state know, you may be wondering?  Well, they can come in and audit you. They will ask for a list of your assets, and then ask you to show the receipts so that they can make sure you paid tax.
  • For an individual - If you buy something big out of state―like a boat or a car―and you're not charged sales tax, you owe use tax. In this case, the state knows because you get on their radar when you register the vehicle. To pay this kind of tax, speak to your personal income tax preparer, and they'll help you report it.
<>Sales Tax

If you sell products, even if you're not shipping them and use other fulfillment vendors, you probably need to charge sales tax. Fulfillment by Amazon or other out-of-state warehouses is not a way to get tricky and avoid state sales tax responsibility. Although Amazon was famously a place to buy and sell to avoid some paperwork, that's not the case anymore. States are targeting e-commerce companies and forcing them to register for seller's permits.

Some main points to consider:

  • The only time you may not need to charge sales tax is if you're selling to another licensed seller, who will charge tax to the end buyer. In that case, be sure you can prove that they have a reseller's permit. If they can't give you one, charge them tax.
  • If you give swag to your customers, you might need to charge tax on the freebies! If the customer understands the price of the item because you communicate it clearly ("we'll give you a free knife worth $19.99 if you pay $100 for ...."), then there's likely a taxable and tangible transaction.  If you're truly giving stuff away, be ready to prove you paid tax as the end user when you bought the swag.
  • Sales tax rates are all over the map―literally. They vary from city to city, not just county to county. So if you do a lot of selling in multiple states, it makes sense to have a subscription to a service that files or helps monitor your rates, such as Avalara.

When in doubt, charge tax!

Need some help? Our Outsourced Finance and Accounting team includes tax compliance experts. We can provide tax advice and help you file the necessary returns.

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Authors
Jenn McCabe - Partner, Outsource HR - El Segundo CA | Armanino
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