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Sales and Use Tax

Businesses are required to pay various taxes, which are determined by a variety of factors including the legal structure, business location, and industry. Certain taxes apply to businesses in any location and industry – such as federal income tax – while other taxes depend on the location and/or the type of business – an excise tax, for example. Sales and use taxes also depend on a variety of circumstances. For example, if you will be charging customers a sales tax, you typically need to acquire a license first. It's important to understand that these taxes are mutually exclusive, meaning that a person is only required to pay either a sales tax or a use tax but not both. This article gives an overview on sales and uses taxes as well as general information about other taxes businesses are typically required to pay.

Sales Tax

Sales taxes are added to the cost of a product or service and are generally paid by the customer. Most states and local taxing authorities impose a general sales tax on retail sales and certain services. Business owners are responsible for collecting these taxes and remitting them to the appropriate taxing authority. Goods purchased to resell from manufacturers or wholesalers are exempt from sales taxes because the tax will be paid by the retail customer. This is commonly referred to as a resale exemption. Please be aware that every business selling taxable goods or services is required to obtain a sales tax license from the state in which it does business, prior to conducting transactions.

Use Tax

Use taxes are generally levied on the sales price or rental charge for tangible personal property on which no sales tax has been paid. This most commonly occurs when an item is purchased from a business located in another state and shipped to the user's state. Please note that most states do not impose sales taxes on products that are shipped to other states.

Other Business Taxes

In addition to sales and use tax, businesses will have other tax obligations at the federal, state, and local level. Generally speaking, all businesses with employees are required to withhold and pay federal employment taxes, which consist of Social Security and Medicare taxes. Individuals who work for themselves generally must pay a self-employment tax, which is their contribution to Social Security and Medicare. Depending on the business's legal structure, a business may also be required to pay federal unemployment taxes. A business will also typically be required to pay state employment taxes. Local taxes, which may be implemented by the city and/or county, can consist of property tax and possibly an operating tax.

It's important to remember that state and local taxes will vary based on the location of your business, so it's important to check your local and state laws before starting a business.

Additional Resources

In the process of starting your business – and before you open your door to customers – it's important to determine your local, state, and federal tax obligations. If you fail to pay the taxes you owe, or incorrectly apply taxes – such as a sales tax – you can face various issues that can be detrimental to your business. For more information and resources related to this topic, please visit FindLaw's section on Business Taxes.

Questions? Get a Free Tax Attorney Match 

In the process of starting your business, it's important to determine all of your local, state, and federal tax obligations. After all, if you fail to pay the taxes you owe, or incorrectly apply sales or other taxes, it could have a serious impact on your business. Learn more and get all of your questions answered by contacting an experienced tax attorney near you. Do so today and you can receive a free initial review of your tax situation.

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