What’s the sales tax?

Sales Tax at Time of Purchase

What Exactly Does Sales Tax and Use Mean?

We all pay for it and we all complain about it. What are we talking about? Taxes, more directly, sales taxes. Texas is one of the lowest property taxes and sales tax rates.  Who wants to pay for something that they don’t have any benefit or return for though, right? Well, we do get quite a bit for our sales taxes, and we’re going to take a look at that here as well as answer a few common and important questions.

The first thing that every consumer should understand is that Texas is a Seller Privilege Tax state. What this means is with sales taxes, the consumer pays the sales taxes to the seller. The seller then pays the amount they collect in taxes to the state – it isn’t part of their profit. This is where the sales tax and use come into the equation. The consumer pays sales tax, and the seller pays those taxes for use of selling their product or services in Texas.

Since it does not require the sales taxes to be paid by the consumer, there is no requirement for the taxes to be listed separately an invoice or receipt, even though most sellers do break it down. 

Most other states are “Consumer Tax state”, where it is the consumer that is imposed with the responsibility of paying the taxes to the seller vs the seller charging the taxes. This doesn’t mean the seller doesn’t have to pay sales taxes, it just means the seller doesn’t have to pay taxes for selling in the state, but the consumer does for shopping in the state.

How is sales tax calculated?

Sales taxes are calculated by dividing the amount of the item being purchased by 1 plus the sales tax rate. Sales tax examples in Texas where the tax rate is 6.25 percent of all retail sales, leases, and rentals for most goods and taxable services.

So, with the sale tax rate in Texas at 6.25%, using a calculator or manually, divide the sales taxable receipts by 1.0625 and the tax is .08 cents on every dollar. There are also various sales tax calculators that you can find online or in a retail office supply store now.

For a business owner selling a product or service, the software they use for their POS system will figure the sales taxes automatically. This makes it error-free for the employee and the company.

Is it illegal to not charge sales tax?

For a retailer that hasn’t established a nexus in a specific state, there is no obligation to pay sales taxes in that state. However, if sales taxes are collected by a retailer in any state and is not registered in the state to collect sales taxes, that is illegal.

What happens if you don’t charge sales tax?

The daily operations of a small business can challenge any owner, especially if you handle several aspects of the business. So, with the bookkeeping and paying sales taxes, it’s easy to overlook filing and paying certain taxes monthly, quarterly, or annually, which is why most small business owners use the services of CPA.

What would happen if a business owner doesn’t collect sales taxes? A CPA, financial consultant, or lawyer would be the best person to ask this question, but here we have researched and found the following consequences a business owner could face:  

  1. The state could demand a year of sales taxes paid at once.
  2. The state could seize your assets, both business and personal.
  3. They will require you to pay the sales taxes and interest and penalties.
  4. Additional costs such as a CPA and a lawyer. Afterward, you will need professional financial analysis and clean-up services so you don’t find yourself in this position again.
  5. You could face fraud charges.

There are just a few of the risks involved when you don’t collect sales taxes, which is why the services of a professional CPA is always recommended no matter the size of your business.

What do sales taxes pay for?

The short answer to this is sales taxes provide funds for state and local budgets that pay for our public services such as fire and police, road repairs, and schools.

Sales Tax Calculation

What sales taxes can I deduct?

This is an area that you need to the advice and guidance of a CPA that has the experience in IRS matters. It gets complicated and confusing.  As a business owner, the sales taxes that you pay for items used in your business are deductible if you list the purchase as a business expense.

Sales taxes are not something that you want to avoid collecting, reporting, and do not avoid paying. It could take years before the state or IRS catch it, but when they do, it is costly and not a pleasant experience. If you have concerns about not collecting or paying sales taxes, or you’re starting up a business, seek the advice of a CPA so you can get on the right road and enjoy your business venture! Need help with your taxes? Call Don R. Walker, C.P.A. today at 817-905-1040!