My middle child learned a tough lesson over the weekend. The Slurpee at the local 7-11 is priced at 99 cents. He had a dollar and thought he could afford this fine delicacy. After the register rang up $1.07, a bit of shock came through, sales tax became a reality. (Fortunately, dad had a few coins, so a meltdown was averted).
In this article, we will create building blocks around sales tax (as well as ‘use’ tax). Our objective is to make a technical, esoteric (and boring) subject relatable and help inform our business owners about this subject that can have long-reaching effects.
First off, sales tax is a consumption tax. Like the opening example, a tax happens once a purchase is made and is a function of purchase price (i.e., a % of the selling price). By contrast, income tax is based on your wages (earnings/compensation). The sales tax is a key source of revenue by state and local treasuries to fund various budget line items, like roads and schools.
The simplicity of sales tax ends here. While income taxes are no picnic, sales tax has many detailed layers of tax code as both state and local (county/city/municipals) establish their own rules and standards… including Washington, D.C.!
As well, each state defines and treats each ‘good’ or ‘service’ very differently. In one state, the same service is non-taxable, but when you cross a river to the next state, that service is now taxable. Certain goods – like selling the American flag – qualify for tax exemption. Some states – like Oregon, Montana, New Hampshire, and Delaware – do not have a state sales tax.
Technology and new laws have made sales tax more complex as more transactions occur electronically. Commerce is more frequently occurring virtually and sparks new challenges for businesses to understand and comply with sales tax code in states other than their headquarters. Operationally, applying sales tax in a homogenous manner can be an undertaking for your systems and finance teams. Compounding the administration of the billing and remittance, is that the tax laws are continuously changing.
In our next article, we will discuss the foundation concept of nexus.
I am Aaron Jaeger, leader of Credo’s CFO practice, CredoCFO. My approach is to work as an extension of your executive team to help you meet distinct goals and create—as we say at Credo—Results That Matter.
Whether you are in hyper-growth mode, launching a new product, or considering your exit strategy, CredoCFO offers fully customized financial strategies to achieve your objective.
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