Sales tax can be among the most confusing of all business taxes you will encounter. Sales tax is a tax paid by the consumer. Businesses are just the means for collecting and remitting this tax. As a business owner, you are obligated to collect the sales tax from your customer and remit it to the state. The business is held liable for any errors in collecting or remitting the taxes, and errors can be costly - there are fines for failing to file, as well as fines for filing late or not paying the taxes when due. So it pays to educate yourself on what your business's sales and use tax obligations are. Here are some of the more common problems I have encountered when working with clients:
Not charging sales tax on taxable sales
In Minnesota, most retail sales are taxable, except for some clothing, food and drugs. Also some services, such as janitorial services, lawn/garden maintenance and massages, are taxable. If you ship taxable items to your customers, then the shipping is also taxable.
Not charging the correct sales tax rate
There are numerous sales tax rates for Minnesota. Besides the state rate of 6.875%, there are local sales taxes such as city taxes and county taxes, and special taxes such as transit tax. The sales tax needs to be charged according to where the customer takes possession of the goods or services. For example, if you own a shop in St Paul and a customer purchases something in your shop, then you need to charge them the rate for St. Paul. If you ship the product to your customer, then you need to charge sales tax according to the delivery address of the customer. One important item to note: If the customer is out of state, you do not need to charge sales tax. Obviously, this can get tricky if you sell anything over the internet, as the shopping cart needs to be set up to charge the correct rate for each customer, based on their shipping information.
Not filing tax returns and/or paying taxes on time
Before you can collect, pay or file any sales tax returns, you need to register with the Minnesota Dept of Revenue. You will be issued a state ID number (if you don't already have one), and will be assigned a filing frequency. Typically, this will be quarterly. The state can change your frequency at the beginning of the year based on your total tax liability for the previous year. If you exceed the threshold for quarterly filing, you will be required to file monthly. If you are below the threshold, you may be changed to an annual filer. Each frequency has its own particular due dates, so knowing your filing status is critical to paying your taxes on time.
Not paying use tax
Whether or not your business is required to collect and remit sales tax, you still may be liable for use tax. Use tax is assessed when you purchase goods that are normally taxable in Minnesota, but you are not charged sales tax (i.e. you purchase the item from an out of state vendor who doesn't charge you sales tax). It is your obligation to track these purchases, accrue the use tax on them and remit to the state according to your filing frequency for sales tax (or annually if you are not required to file sales tax returns).
In addition to these more commonly overlooked issues, you can have special issues related to your business that may require further investigation or follow up with the state to ensure that you are charging tax correctly. Unfortunately, most people do not find out they have any of these issues until they are audited by the state. That is not the time you want to find out about problems!!
You may think that it is unlikely you will ever be audited, but you are actually quite likely to be audited. The state audits many businesses, big and small, and since they can audit you every 3-1/2 years, some businesses get audited repeatedly. The more prepared you are to deal with an audit, the better the outcome for your business and the less likely the auditors are to return. So, in the case of sale and use tax, an ounce of prevention really is worth a pound of cure!
The Minnesota Dept of Revenue web site has an instruction booklet and many facts sheets available on specific issues, so it is a great place to start to gather information for your business. I would also be happy to discuss your sales and use tax issues with your to ensure that you are meeting your obligations and have the proper documentation. P lease contact me at [email protected] to schedule an appointment.
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