If you’re selling tangible goods, then you’re required to collect sales tax from your customers and pay the government. What is a tangible good? Although the definition may vary slightly between states, you can pretty much classify a tangible good as being any item that can be seen, weighed, measured, felt, or touched or is in any other manner perceptible to the senses. Real estate is excluded.
To collect sales tax on the products you sell to your customers, you need a sales and use tax permit. What’s the difference between sales tax and use tax?
Sales tax is imposed on all retailers (anyone who sells tangible goods — not services — in the state). Retailers are required to pay and report sales taxes to the state board of equalization, and they have the option to collect sales tax reimbursement from their customers at the time of the sale.
Use tax is imposed on you when you purchase something from an out-of-state vendor and use, consume, or store the item in your state. Use tax also applies if you lease an item. And you thought you were avoiding tax when you bought that fancy TV off eBay!
You are typically imposed a statewide sales tax and a local sales tax that differs from city to city. If your business isn’t located in an incorporated city, then you’re required to pay the county at its local sales tax rate. By combining state and local tax rates, you come up with the amount of sales tax to charge your customers.
What if you aren’t selling tangible goods? What if you run a dry-cleaning service or a dog-grooming facility? Aren’t you in the clear? Well, in some states you are. Unfortunately, in other states, you are still required to go through the application process. State governments prefer that individuals aren’t the ones deciding whether they are liable for paying sales and use taxes. The government prefers that a seasoned tax collector make that determination.
Although it may seem like a hassle, you want to go through this application process. The alternative is the harrowing experience of having a state tax auditor set up shop in your office for two (or more!) weeks and proceed to pore over each and every income and expenditure record, tallying up use tax on sticky notes you bought online and sales tax on small thank-you items you shipped to your clients.
Not only will the auditor pull every single penny of unpaid taxes out of the woodwork, but the state will impose hefty fines on top of it all. Needless to say, not fun.
Most states call the department that collects the state taxes the board of equalization. A lot of businesses pay this department a hefty chunk of dough every quarter.