Sales taxes are imposed at the state, county, and city level – frequently by all three at once. It is also possible for a special tax to be added to the sales tax and applied to a unique region, such as for the construction of a baseball stadium or to support a regional mass transit system. The sales tax is multiplied by the price paid on goods and services on transactions occurring within the taxing area. However, the definition of goods and services that are required to be taxed will vary by state (not usually at the county or city level), and so must be researched at the local level to determine the precise basis of calculation. For example, some states do not tax food sales, on the grounds that this is a necessity whose cost should be reduced as much as possible, while other states include it in their required list of items to be taxed.
A company is required to charge sales taxes to its customers and remit the resulting receipts to the local state government, which will split out the portions due to the local county and city governments and remit these taxes on the company’s behalf to those entities. If the company does not charge its customers for these taxes, it is still liable for them, and must pay the unbilled amounts to the state government, though it has the right to attempt to bill its customers after the fact for the missing sales taxes. This can be a difficult collection chore, especially if sales are primarily over the counter, where there are few transaction records that identify the customer. Also, a company is obligated to keep abreast of all changes in sales tax rates and charge its customers for the correct amount; if it does not do so, then it is liable to the government for the difference between what it actually charged and the statutory rate. If a company overcharges its customers, the excess must also be remitted to the government.
The state in which a company is collecting sales taxes can decide how frequently it wants the company to remit taxes. If there are only modest sales, the state may decide that the cost of paperwork exceeds the value of the remittances, and will only require an annual remittance. It is more common to have quarterly or monthly remittances. The state will review the dollar amount of remittances from time to time, and adjust the required remittance frequency based on this information.
All government entities have the right to audit a company’s books to see if the proper sales taxes are being charged, and so a company can theoretically be subject to three sales tax audits per year – one each from the city, county, and state revenue departments. Also, since these audits can come from any taxing jurisdiction in which a company does business, there could literally be thousands of potential audits.
The obligation to collect sales taxes is based on the concept of nexus, which is covered in a separate article. If nexus exists, then sales taxes must be collected by the seller. If not, the recipient of purchased goods instead has an obligation to compile a list of items purchased, and remit a use tax to the appropriate authority. The use tax is in the same amount as the sales tax. The only difference is that the remitting party is the buyer instead of the seller. Use taxes are also subject to audits by all taxing jurisdictions.
If the buyer of a company’s products is including them in its own products for resale to another entity, then the buyer does not have to pay a sales tax to the seller. Instead, the buyer will charge a sales tax to the buyer of its final product. This approach is used under the theory that a sales tax should only be charged one time on the sale of a product. However, it can be a difficult chore to explain the lack of sales tax billings during an audit, so sales taxes should only be halted if a buyer sends a sales tax exemption form to the company, which should then be kept on file. The sales tax exemption certificate can be named a resale certificate instead, depending upon the issuing authority. It can also be issued to government entities, which are generally exempt from sales and use taxes. As a general rule, sales taxes should always be charged unless there is a sales tax exemption certificate on file – otherwise, the company will still be liable for the remittance of sales taxes in the event of an audit.