Confused about sales tax? You're not alone
Sales taxes, which so many retailers collect, and even more end up paying, are increasing in both amount and complexity. Cash-strapped state and local governments are raising sales tax rates and stepping up enforcement of their collection rules. This, of course, increases the burden on every racquet sports business, whether collecting sales taxes or required to pay sales and use taxes on its own purchases.
Unfortunately, when it comes to sales taxes, confusion often is the name of the game. The 7,500 taxing jurisdictions in the U.S. routinely define and tax the same products and/or services differently. Orange juice, for example, is defined as a fruit in one state and taxed. As a beverage in a neighboring state, however, that same orange juice may not be taxed at all.
Generally sales taxes apply on the sale of just about anything to just about anyone. In most states, as well as in many cities, a retailer must collect sales tax on all applicable sales. But which sales are taxable and which are not?
And, don’t forget that every retailer acting in their capacity as sales-tax collector must pay over to the taxing jurisdiction the tax on all sales upon which the tax is levied — regardless of whether actually collected or not. If your business doesn’t collect sales tax, yet you’re supposed to, you’ll have to pay those amounts from your own pocket.
Another retailer, unfamiliar with the rules, may end up paying over to government tax authorities sales taxes, whether collected or not, on sales where no tax was imposed. Or, even worse, the business may pay over sales taxes based on the operation’s gross sales.
Obviously, sales-tax collection would be far easier if the tax were based on total sales without exceptions, exclusions or exemptions. Exceptions are usually made for sales to resellers, either wholesalers or retailers, which have valid state resale certificates.
Another exception to the general sales tax rules involves sales made to tax-exempt institutions or organizations, such as public schools and libraries, where no sales taxes are collected. Further complicating matters, in some states, sales taxes apply only to products, while in other states, sales taxes apply to services as well.
KEEP RECORDS IN ORDER
Take a look at any state’s sales tax code and you’ll see how important it is that you keep good records. For example, in California, the records demanded “must include the books of account normally maintained by the average prudent businessman engaged in the activity in question, together with all bills, receipts, invoices, cash register tapes or other documents of original entry supporting the entries in the book of account as well as all schedules and working papers used in connection with the preparation of tax returns.”
Obviously, this is a tall order for any retailer. Fortunately, there is a so-called “loophole” that permits a business to keep only those records that are “ordinarily maitained … by the average prudent businessman.”
The area of sales-tax record-keeping also provides an excellent illustration of just why records are so important. Frequently overlooked by many tennis retailers is the amount of sales tax included in the reported total receipts. If adequate records are not maintained, a retailer can wind up paying both sales tax on the sales tax and income tax on the sales tax.
This can happen because “gross receipts” means the total of all monies coming into the business, including sales-tax collections. Obviously, careful record-keeping is needed in order to “black out” the sales tax from the your business’s gross sales.
THE BAD-DEBT WRITE-OFF
Although it is relatively easy to recognize when a sale has occurred, it requires good bookkeeping or tracking to note the point of time when a sale is actually written off as not collectable. Bad debts, bounced checks, unpaid invoices and the like are, first and foremost, a federal tax write-off, but don’t ignore them for sales-tax purposes.
Bad debt can usually be excluded from gross receipts with a reduction in the period that it is actually written-off. Naturally, if that bad debt is eventually recovered or collected, the amount must be re-included in gross receipts at that time.
Remember, writing off bad debts for sales-tax purposes against the sales-tax liability produces benefit of 100 percent of the originally reported tax. Sales taxes written off against federal income-tax liability, however, result in only the savings of the income tax on the sales tax.
IN THE BEGINNING
Before any business opens its doors, it needs to be registered with the sales-tax authorities. In some states, it is a criminal offense to undertake sales without a license or permit. Any retailer who fails to collect sales tax may, of course, be held liable for the uncollected amount.
And don’t forget that all-important resale certificate. Without it, you may be paying sales tax on supplies, goods and products that are resold to customers. It is the sale to the ultimate consumer of goods, products or services that is taxed — all intermediate sales are usually exempt from sales-tax payments if the buyer has a resale tax license that will allow it to collect sales taxes, both the amount unpaid when purchased and on the amount added before sale to the ultimate consumer.
If your racquet sports operation is among the increasing number of retailers doing business on the internet, if you ship or sell goods in another state, or if you do business in another state, be careful. Although many retailers have in the past ignored the collection of sales taxes on out-of-state transactions, today may be a different story. Just because you don’t have a physical location in a state doesn’t always mean that you don’t have to collect the sales tax. Check with all authorities in every area where you do business, not only where your operation has a physical presence.
DISCOUNTS AND COUPONS
Many businesses either offer or take advantage of discounts. However, when it comes to sales taxes and “discounts,” it is all in the timing. In most jurisdictions, a “prompt-payment discount” is considered taken after the sale in many states and is often included in gross receipts. Thus, the seller reports the gross receipts without reflecting the amount the customer may deduct due to a prompt payment. In a number of other states, the seller can adjust the gross receipts after the fact, reflecting the discounted amount of the computation received on a prompt-payment discounted sale.
In many states, the reduction in selling price represented by the netting of a trade or quantity discount shown on the invoice results in the gross receipts being reduced accordingly. However, if the discount is conditional on some factor outside of or subsequent to the sale, such as total annual purchasing volume, these discounts may not be excluded from gross receipts.
Coupons or script, used to reduce the cash tendered by the customer for goods purchased, are more often than not considered an invalid basis for reducing taxable gross receipts. For example, the grocery store that takes a manufacturer’s coupon from the customer in lieu of cash and presents that coupon to the manufacturer for credit cannot reduce the gross receipts by the value of the coupon.
Naturally, this may be a legitimate exclusion in some states.
By now it should be obvious that sales taxes are a major headache for many businesses. However, they don’t have to become a financial burden for any retailer that understands which goods or services are taxed and which are not. Paying only the tax due on taxable sales is just as important as collecting sales taxes in the first place.
See all articles by Mark E. Battersby
About the Author
Mark E. Battersby is a tax advisor and author in Ardmore, Pa.