Sales Taxes, A Brief Explanation

Most local businesses are required to collect and pay sales tax.

by Anne Lane

Sales taxes are imposed by state and local governments on the sale of goods and services. Depending on where your business is located, different goods and services may or may not be taxed. Some cities may not impose sales taxes on grocery items, for example. In general, whether the customer realizes it or not, most businesses must pay sales taxes on their gross receipts.

Sales taxes are imposed on the total amount of money a business takes in. No deductions are allowed for the cost of the goods or services to the business. If your business sells snacks through vending machines, the sales tax is imposed on the entire amount of money received from the vending machines. You do not get to deduct the amount you spent on the snacks that you put into the machines, the cost of owning and maintaining the machines, or any other business expenses. That is why sales taxes are also referred to as gross receipts taxes. They are a tax on the amount of gross receipts that your business takes in.

Sales taxes don't just apply to merchandise these days. Many service businesses are now required to pay gross receipts taxes on the money they take in from providing services. Depending on how the state law is written, the service provider may not be allowed to pass this tax on to the consumer. Just about everyone is used to paying sales taxes above the advertised price of an item. But when you pay your doctor's bill or your lawyer's bill you don't see an amount on it for gross receipts taxes. Usually these service providers are required to pay taxes on the amount of money they receive for the services they render. But they may be prevented from passing it on to the consumer as an extra charge. Obviously the consumer pays no matter what. It is just a question of whether they know that part of the fee is really going to pay a state sales tax.

There are exemptions to the sales tax. In the vending machine example above, the business owner would normally provide a tax exemption certificate to the business from which he buys the snacks for the vending machine. The exemption would allow the first seller of the snacks to not pay sales tax on them. This way sales taxes are not collected twice on the same items. Another common exemption is for non-profit organizations. They too can provide businesses with tax exemption certificates that enable them to purchase goods without paying sales tax on them. Or in the case of non-profit medical clinics, they would not have to pay sales taxes on the services they provide.

Check with your state's taxation and revenue department about what goods and services are subject to gross receipts taxes. They can also let you know the process for claiming exemptions and when and to whom exemptions apply.

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