State tax is one of the last things most people address when running a business. When you are a business owner, there are a million things that you must understand to make it a success. The first thing on most people’s minds is sales and marketing. But state tax is an area that should not be ignored because it can bite you…right in the wallet. While every jurisdiction is different, here are five questions that all business owners should ask about state taxes.
State tax question 1: Do I have nexus?
Nexus is presence in a jurisdiction. There are different thresholds for different types of taxes. For example, you may have nexus for state income tax, but not sales tax. It is important for you to understand the types of state taxes your business may be subject to and if you have nexus in pertinent jurisdictions. The threshold for nexus varies by state tax type and from state to state.
State tax question 2: How do the tax laws affect my business?
The tax treatment of goods and services can be a complex. The key is understanding your business. A few questions to ask include, but are not limited to: Are you selling goods? Are you selling a service? Are you selling a taxable product or service? Does your invoicing affect how you should collect tax? What is the taxability of the items in all of the jurisdictions in which you have nexus, i.e. a duty to register to collect and remit transaction tax? Are the goods that you purchase taxable?
State tax question 3: How do I report the taxes to the taxing authority?
When you register in a jurisdiction, the taxing jurisdiction will normally give you guidance regarding their tax reporting requirements. But before you file your tax return, you must understand how to calculate the tax due. That means understanding amount subject to tax, the appropriate tax rate, how to report use tax, what documentation you need to substantiate your nontaxable sales and what tax exemptions are available.
For an online class that explains how to complete your Texas sales and use tax return, visit Understanding Your Texas Sales and Use Tax Return.
State tax question 4: Am I doing it right?
That is the million-dollar question. Reporting and collecting tax can be nerve wracking. If you don’t understand something, ask questions. Contact the applicable taxing jurisdictions, review the Tax Code and state tax authority publications, contact your accountant, attorney or sales tax professional.
Some clients ask friends in the same industry how they address state tax issues. This is loaded proposition because sometimes your friend may, unknowingly, give you bad advice. The onus is on you as the business owner and responsible party to know how state tax laws affect your business and comply with them.
State tax question 5: What is the statute of limitations?
For most jurisdictions, the statute of limitations for sales tax is 3 to 4 years. It varies by state. However, that can be extended if your business never registered, never filed a return that was required, or there is an issue of fraud. You should retain your documents for at least the applicable statute of limitations. Keep in mind your business may also be subject to withholding taxes, corporate income tax, franchise tax, etc. You should make sure that you know what the statute of limitations is on all applicable taxes that you must report.
Those are my picks for the top questions that you must ask as you can begin to address your state tax responsibilities. It can be challenging and a little scary. But there are resources available to help you. It is better to ask these questions before you receive a Notice of Routine Audit or a Nexus Questionnaire from the state taxing authority.
If you need additional information, you are welcome to visit Know if You Have A Sales Tax Issue.
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