The Lowdown on Collecting and Reporting Taxes
(YoungBiz) - Starting a business is not as easy as finding a storefront, stocking it and opening your doors to the eager customers waiting outside. If you're planning to sell products rather than services, the long, and sometimes confusing, process starts well before you'll see your first sale.
Every business that sells tangible goods must have a seller's permit (also called certificate of resale or sales tax permit), collect sales tax, file reports with payments of the tax collected, and maintain records of all transactions. Sound like a lot of work for nothing? Then consider this: In many states it's a crime not to fulfill these requirements. Permits can also be revoked for failure to follow the rules.
|Visit our online Small-Business Tax Center for more help in sorting out your taxes.|
While every state has sales tax requirements, these requirements vary, and most cities charge sales tax as well. So research is the first step in your attempts to stay on the right side of the law. A good place to start is The Sales Tax Clearinghouse, a site that lists tax rates, exemptions and Web addresses for each state.
Casey Medlock, 21, of Palatka, Florida, found that following the sales tax regulations is not as hard as it sounds--just time-consuming. In her home state, Medlock had to fill out a form from the county courthouse and pay $30 for a certificate of resale that allowed her to open Scrappies, a scrapbooking business. Once she opened her doors, Medlock found that she had to keep careful records so she could send in the accurate amount of tax each quarter. How does she do it? "Every day, I total the receipts, staple them together and write the total on the back," she explains. "At the end of the quarter, I add them up, calculate the sales tax, fill out my report and send in the money."
But, according to Medlock, the most important rule to remember is never to mix sales tax money with regular operating capital. It's worth getting a separate account in which to keep that money.
Javier Ortiz, 17, of Edna, Texas, agrees with Medlock. "Every time I charge sales tax, I count the money and put it in a box," he says. "That way, there is no temptation to use the money for something else," he explains. Ortiz, who buys gift items like frames and candles from wholesalers and then sells them to his retail customers, is also a record-keeping convert, especially since he has a low volume of sales and, therefore, only has to pay his sales taxes annually.
Paying each year may sound easier than paying quarterly, but Ortiz warns that it can actually be more difficult to keep up with the records. That's why he keeps a notebook containing all the sales tax amounts he has charged.
Since Medlock and Ortiz plan on growing their businesses, both will have to keep on top of sales tax requirements. Medlock, for instance, knows that she'll soon need a system for tracking nontaxable sales, such as sales to nonprofit organizations or mail-order sales to customers in other states. She's also found that shipping and handling are nontaxable in most states.
But how do young 'treps like Medlock and Ortiz keep up with the rules? While the Sales Tax Clearinghouse Web site is a good place to start, it doesn't offer information on regulations in each city. Therefore, it's important to dig a little deeper. Ortiz took a class on entrepreneurship and enlisted the help of his teacher. Investing in the services of a CPA may be the safest alternative. And remember, tax agency employees are glad to answer questions and can often provide you with brochures, handouts, sample forms and rate charts.
For reprints and licensing questions, click here.