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Sales Tax

Handling Sales Tax & Filing State Sales Tax Returns

Accurate filing of state sales tax and helping minimize tax liability for international entrepreneurs within the United States

All professional tax experts working alongside Mount Bonnell Advisors are fully dedicated to minimizing tax liability for every single client – whilst maintaining accurate compliance with every-changing tax laws.

So, with our help and advice, you can successfully establish appropriate tax deductions, credits, and identify further potential opportunity for reductions in tax payments. In addition, we also accurately prepare and file sale tax returns spanning all 50 states – your state sales tax return will then be filed electronically for maximum convenience.

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Book an Expert Consultation on Building Your Business in the US, US Taxes and Moving to the US

Compliance service   

Here at Mount Bonnell Advisors, we fully understand the time constraints place upon tax audits and state compliance checks. Due to this, associated tax specialists will conduct a thorough overview of your current financial records, in addition to:

  • Calculating and collecting due tax
  • State registrations
  • Accurately filing the returns necessary to pay the tax
  • Transmit collected tax
  • Effective account maintenance
  • Notice correspondence

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Timely consultation  

Many business owners simply aren’t aware of all tax regulations relevant to them. This means lots of people inadvertently pay more sales tax than they should, and miss out on significant tax refunds without being aware they’re even entitled to them.

By making use of our bespoke consultation services, we’ll guarantee your state tax payment is fully compliant with all federal and state regulations. Constantly staying up-to-date with appropriate monthly tax charges, we’ll also offer tailored advise in the following fields:

 

Safe & secure                        

100% focused on making the entire tax process as convenient and stress-free as possible, all returns are electronically filed to guarantee faster processing. We also provide our clients with a fully secure online portal, allowing you to smoothly transfer digital tax documents with ease.

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What exactly is US sales tax?

In short, sales tax is defined as tax on retail purchases. It’s typically used to pay for items within the state or local budget, such as roads, fire departments and schools. Essentially a consumption tax, sales tax is usually charged on the sale of products from retailers to customers.

Contrary to popular opinion, the Internal Revenue Service (IRS) doesn’t actually have any connection with sales tax. Most people think this simply because whenever the word ‘tax’ is mentioned, the IRS is commonly thought of in association. In fact, US sales tax is governed at state level, with each state setting their own sales tax rates, laws and rules.

This means you’re highly likely to find yourself paying sales tax at differing rates, or on different items, depending on which state you’re in.

As sales tax is typically used to pay for state and local budget items, a huge majority of areas rely on sales tax to solely fund their budgets. Therefore, many state governments are incredibly serious and strict with regard to collecting the correct amount of sales tax owed to them.

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How is sales tax calculated? 

Essentially a percentage of an item’s sale price, sales tax is calculated by adding this percentage to the total cost of the item.

To accurately calculate sales tax every time, use the following formula:

Total item price x 1 + sales tax rate = total sales tax

For example, if you were buying an item with a price of $10, and the sales tax is set at 6%, the calculation would be $10 x 1.06 – making the total sales tax $10.60.

As mentioned, rates of sales tax can considerably vary between states and even between cities or entire countries.

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What items can be taxed?

Most of the time, tangible products that can be seen and touched are taxable. Therefore, many services aren’t.

However, whilst this is typically considered a general rule, specific products and services eligible for taxation are likely to vary from state to state.

A few examples of commonly taxed products and services are:

  • Candy
  • Clothing
  • Gift-wrapping services
  • Textbooks
  • Digital products such as movies & music

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How is sales tax calculated when buying online?   

When making online purchases, your customers will typically pay the same rate of sales tax you’d pay when buying something from a physical store. However, they may sometimes pay an alternative rate – or might simply pay no sales tax at all.

Generally, when customers buy online, they’ll either pay:

  • The confirmed sales tax rate at their home address
  • The base sales tax rate of their home state with no local rates in addition
  • A sales tax rate close to the rate at their home address
  • No sales tax

Most of the time, you’ll be expected to charge a customer the sales tax rate confirmed at their home location. But, if you and the customer in question are located in the same origin-based state, you might be required to charge them the sales tax rate defined at your business location – not your home.

Due to these inconsistencies, it’s vital for you to know whether you’re situated in a destination-based state or an origin-based state for tax purposes. The majority of US states and Washington D.C. are destination-based, with only 11 states being origin-based. These are:

  • Arizona
  • California
    • This is mixed – state, county and city sales are all origin-based, whilst district sales (supplementary local taxes) are destination-based.
  • Illinois
  • Mississippi
  • Missouri
  • New Mexico
  • Ohio
  • Pennsylvania
  • Tennessee
  • Texas
  • Utah
  • Virginia

If your customers live in one of these 11 states, they may find themselves paying a different amount of sales tax than normal when making purchases online.

In addition, it’s important to be aware that some retailer’s shipping costs are taxable. But, as with all other forms of sales tax, this will vary from state to state.

Here is an example to demonstrate both taxable and non-taxable shipping charges:

Item cost: $10

Shipping cost: $3.99

The taxable total comes to $13.99, and a customer will be charged sales tax on both the price of the item and the subsequent shipping charge.

If shipping charges aren’t taxable, the taxable total will just be the price of the item. In this example case, $10.

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Why do some online retailers not collect sales tax?           

In some states, some retailers aren’t obliged to collected any sales tax at all. However, this largely depends on the specific business activities of the retailer on question.

So, as a customer, you’ll be charged sales tax purely based on whether or not the seller you’re buying from is required to collect tax by their state law.

Retailers that are legally obliged to collect sales tax are those with ‘sales tax nexus’. Online retailers can have this for multiple reasons, such as:

  • An employee in your state
  • A location in your state
  • A contractor, salesperson or other associated personnel in your state
  • Temporarily selling in your state at an event like a tradeshow
  • Having an inventory or warehouse in your state

However, regardless of whether a product is shipped from an out-of-state location, this doesn’t mean the seller doesn’t have sales tax nexus in the state they’re shipping to.

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Consumer use tax     

This form of tax means that if a seller doesn’t charge sales tax on an otherwise taxable purchase, the customer is meant to pay the appropriate tax amount.

Typically, most states will include a line on state income tax forms where any owed tax must be declared.

As expected, consumer use tax is incredibly challenging to enforce. Typically, only the most law-abiding shoppers will keep accurate track of how much sales tax they should have paid on a purchase if the item(s) in question had been taxable.

However, some large online marketplaces are required by some states to send notifications to customers reminding them of their tax obligation. An example of this comes from Amazon, sent to residents in the state of South Carolina:

Hello from Amazon.com,

As you may know, Amazon was not required to collect sales or use tax on orders delivered to South Carolina prior to January 1, 2016. However, South Carolina does require us to provide you with the notification below. Since Amazon is now required to collect tax, this will be the last notification you will receive on this topic.

REQUIRED NOTIFICATION:

You may owe use tax on purchases you made from Amazon during the previous calendar year. The amount of tax you may owe is based on the total sales price of the items you purchased during the calendar year unless an exemption exists under state law or you have already paid the tax. A sale is not exempt under state law because it is made through the Internet. The total sale price of purchases you had shipped to South Carolina in 2015 was $XXX.XX This is the amount that you may include in your South Carolina use tax return to calculate the appropriate sales tax owed unless you have already paid the tax.

In addition, the South Carolina Department of Revenue requires us to provide you with the following links that you can use to get more information and pay any taxes due:

Use Tax: http://www.sctax.org/tax/use

Paying Your Use Tax: https://www3.sctax.org/DOREPAY

Essentially, this notification letter was a way of Amazon assisting the state of South Carolina to collect consumer use tax from their buyers. And from January 1, 2016, Amazon began automatically collection sales tax from South Carolina buyers, so sending letters like the one above is no longer necessary.

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What’s the difference between sales tax and VAT?          

With multiple different tax systems present worldwide, many businesses become overwhelmed. However, two of the most commonly-know consumption taxes are sales tax and value added tax – typically shorted to VAT.

VAT is present in over 150 countries across the globe, including 33 out of 34 OECD members. In contrast, sales tax is collected in fewer countries, with the most notable example being the United States.

VAT is essentially a form of indirect taxation, and is categorised as a broad-based consumption tax. It’s placed upon numerous services and goods throughout every stage of the supply chain, with each relevant party collecting and subsequently paying it to the government whilst giving the final cost to the final consumer.

As businesses are eligible to recover VAT on most purchases, the primary notion behind it is that each business simply plays tax on the value added to the product/service in question being purchased.

The main benefit of this process is that it’s primarily self-administered, since almost all businesses will want to recover the VAT they incur – and there will be an audit trail present showing all sales and purchases made by the businesses in question. However, the most obvious disadvantage of this system is the intense account handling it requires.

In contrast, sales tax is usually levied on the lease or sale of services or goods. Sellers will typically collect the appropriate sales tax amount directly at the point of sale but, if the purchaser is planning to re-sell, the original seller is usually considered exempt from having to pay the requires sales tax in the first instance.

At a later stage, the seller will transfer the collected sales tax to their responsible government agency. However, as there’s often multi-jurisdictional taxes being applied to one sole transaction, calculating accurate sales tax can be a challenge. And, when compared with VAT, sales taxes generally have a very high level of customer avoidance.

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Frequently Asked Questions (FAQs) About Taxes, Company Formation, and Residency in the U.S.

We’ve compiled over 150 of the most frequent questions and answers (FAQs) on tax, company formation, and residency in the U.S. in our knowledge base. You can visit our knowledge base here.

If you find that your personal questions have not been answered, book a telephone consultation here.

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Need Advice on Taxation, Company Formation, and Residency in the United States?

Starting a business in the U.S. can be both exhilarating and exasperating. There is much to know and even more to learn, and the pace of the information coming at you can be overwhelming.

That’s where Mount Bonnell Advisors come in.

Would you like to live your very own American Dream? At Mount Bonnell, we can guide you through the labyrinth of regulation and red tape and out into the blue skies of a dream come true – the dream of living and working in America.

Whether it’s technical issues around tax or residency, or strategic ones involving business formation and growth, the experienced team at Mount Bonnell Advisors are here to help.

So make that dream a reality by booking a consultation today with Mount Bonnell Advisors. Let the adventure commence!

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