Sales tax can be deducted from federal income tax only if deductions are itemized. In general, taxpayers with sales tax as their only deductible expense may find that itemizing deductions is not worth the time. Itemizing deductions also involves meticulous record-keeping and can be tedious work because the IRS requires the submission of sales tax records, such as a year’s worth of purchase receipts. Anyone who plans to itemize should be keeping detailed records, as it will be very helpful in determining the amount of sales tax paid. If you fail to collect sales tax for a state in which you’re responsible for collecting it, you still owe the tax. State and local tax authorities will seek to collect past taxes you should have collected, and they may charge you interest or other penalties on the past-due balance.

• This can make the purchase price of the same item in different locations differ.
• Each state may include or exclude certain products from sales taxes based on their own rules, so the taxability of digital products varies greatly by state.
• You should not use a resale certificate if there is any question whether you will resell the property.
• Metoyer keeps meticulous reseller sales tax records using a spreadsheet that itemizes each transaction and any tax collected.

Comparison shoppers might use the net of tax price to see if buying an item in one location is beneficial over buying it in another location. You need to register your business with any state for which you’ll be collecting sales tax. To learn how to register, contact the state’s department of revenue or other tax authority. Be sure to have business information available, including your do i need a tax id number for my business employer identification number, business address, and banking information if you plan to pay sales tax electronically. If you sell items to a business with a resale certificate, do not collect sales tax. When you are harvesting resale certificates from your customers, you must maintain a file of properly completed and valid resale certificates that were accepted in good faith.

Internal consumption of inventory triggers tax liability

Sales tax is imposed on sales where the transfer of title or possession occurs within the taxing jurisdiction. Therefore, if a sale occurs in interstate commerce, the origin state where the sale occurs cannot tax the transaction. If you’re newer to sales tax, and you’re not sure how to approach all the decisions you need to make… you’re not alone.

Most e-commerce platforms look up the customer’s address automatically and charge the applicable tax rate. You’re only responsible for selecting the jurisdictions for which you must collect the taxes. You should not accept the certificate if you know or have reason to believe the property is being purchased for other than resale. Our partners cannot pay us to guarantee favorable reviews of their products or services. For monthly filers, reports are due on the 20th of the month following the reporting month.

Understanding sales tax in the reselling industries

If you’re operating in a state that’s different than the state in which you incorporated, you’ll need to complete a Foreign Qualification process to be able to do business in a different state. One more detail to consider is… Are you the one making your own sales or are you selling through a marketplace? Marketplace nexus requires online marketplace facilitators to collect tax and remit tax on behalf of sellers operating through their systems. If you’re using a marketplace, make sure you confirm who is collecting the tax so that it doesn’t end up over or under collected.

When to Charge Another State’s Tax

In other states, some wholesale transactions are taxed at a rate that’s different from retail rates. You may be able to get a sales tax certificate or a seller’s certificate (same thing) which exempts your business from sales tax for purchases that will be turned into products for resale. The sales tax certificate doesn’t apply to products that you buy for use within your company, like copy paper and office equipment. It also has nothing to do with sales taxes you collect from customers. The landscape of internet sales tax is continually changing, and a recent (2018) Supreme Court decision opened the way for more states to charge sales taxes on sales over the internet. As of December 2019, 43 states collect sales tax on internet transactions.

Not properly vetting sales tax exemption certificates

However, if you later sell or donate this property to charity, you will almost certainly be hit with sales or use taxes even if the sales price is discounted. Now, the question that you are probably asking yourself is, what is the sales amount I’m suppose to pay tax on? First, if the property is donated to charity, then its value for tax purposes should be what your business paid for it when it was put into inventory.

Not using your reseller certificate when buying wholesale

I talked to my state’s division of taxation (New Jersey) and they stated you can submit a form to get a refund for the sales tax that you paid. Just show them proof that tax was paid on an item that wasn’t supposed to be taxed and get the refund for that. Otherwise the state is charging tax twice and you’re paying extra (the additional sales tax) on your purchases. At that time, you will be required to pay use tax on the value of the property when you bought the property. While the products sold by resale businesses may be very different, they all buy products and then resell them in the same form in which they were acquired. For example, if you buy wheels from a wholesaler and then turn around and sell these same wheels, you are a reseller because there is no difference between what you bought and what you sold.

Treasury and Financial Systems

Watch out for bundling if you combine any tangible property with a service for a single charge. Check out this video to see how two differently formatted invoices for the same transaction (one bundled, one itemized) impact the taxability of the services you provide. For example, if your CPA prepares your income tax return, is that a service or a product? In another example, if you pay for a company to install a computer system in your office, with thousands of dollars of computers, connectors, routers, etc., that sounds like a product.