Sales tax is unavoidable for any business. Whether you operate in a service or product selling sector, you are most likely to collect and clear sales tax at a certain point in your business operation.
However, the process of collecting and remitting tax can be a bit challenging, especially for small businesses. Except for the direct use tax, it also has other significant impacts on small businesses. And today, we will explore the impact of sales tax on small businesses in detail.
An Overview of Sales Tax
Before we move forward and discuss the impact of sales tax on small businesses, let’s have a quick look at the brief overview of sales tax, as this will help you have a better grasp of the concept. By definition, a sales tax is a type of tax paid to the governing authority of the state or country for the sale of goods or services that take place in the country.
Sales tax is an indirect type of tax which is paid at the time of purchase or exchange of certain taxable goods. Sales tax is charged as a percentage of the overall product or service value.
Different Types of Sales Tax
There are several types of sales tax charged by the government body on goods and service businesses. Below, we will learn about some significant ones briefly.
- Wholesale sales tax – This is a tax charged on wholesale goods in the form of packaged and labelled shipments.
- Manufacturer’s sales tax – This tax is charged on the sales of tangible personal products of manufacturers and producers.
- Gross receipts taxes – It is levied on all sales of a business and is primarily criticised for its cascading effect.
- Retail sales tax – Thais taxes are charged on the sales of retail tangible products at the time of selling to the final consumer.
- Excise taxes – Excise tax is applied to a small range of products and directly charged to the wholesalers, and suppliers rather than the retailers.
- Value-added tax – applied for all sales. Therefore, a resale certificate is needed to avoid the system.
- Use tax – This type of tax is charged directly from the consumers at the time of purchase of certain taxable goods.
- Turnover tax – This tax is imposed directly on capital goods as an indirect tax similar to the sales tax.
How Does Sales Tax Impact on Small Businesses?
As we have discussed the details of sales tax and different types of sales tax, we can finally move to discuss how sales tax impacts small businesses. Below, we will explore some of the most significant impacts of sales tax on small businesses one by one-
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Compliance Costs
The first and most significant impact of sales tax that no small business can avoid is the compliance cost. To successfully collect and remit tax, businesses must navigate the complex and highly intricate state and local law that varies from one location to another. This takes up a lot of time resources and expertise that can be used to deal with another essential aspect of running a small business.
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Financial Burden
Another way the sales tax hugely impacts small businesses is the financial burden. Sales tax implied or goods and service businesses. Based on the state or local jurisdiction the sales tax rate can range from 0% to 10% or more. To fulfil this tax businesses must keep aside a certain amount of return for each sale they make. It can add up to a larger amount for small businesses with tight margins and profit rates.
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Customer Behaviour
Not to mention, customer behaviour has a close link with the sales tax as it can directly influence customers’ purchasing decisions. For example, a consumer of a good can prefer to purchase a product online from a different state with lower sales tax from the local ones. This can harm the local small businesses causing a major customer loss.
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Impact on Pricing
Sales tax also has a deep impact on pricing especially in small businesses. For instance, some jurisdictions may allow certain goods or services to include sales tax in the listed price of goods/services while others may require the sales tax to be added on the top of the advertised price which can create confusion and impact consumers’ purchase decision.
Different Tax Rates for Different Locations
The different tax rate for different locations adds up to the complexity of sale tax compliance. Small businesses running across different cities or states may find it challenging to navigate varied tax rates and regulations of different locations.
With their limited resources and human force they can face unwanted complexities during the compliance of different tax rates of different locations.
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Administrative Duties
No wonder, compiling sales tax also brings additional administrative duties which can be quite bothersome for small businesses. They need additional resources, and human force to execute these added administrative duties which may include registering for different sales tax permits, keeping track of the changing sales tax rates, and tax laws, filing regular tax returns, maintaining records and more.
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Budgeting and Planning
Sales tax influences small businesses to properly plan and budget. Budgeting and planning help small businesses avoid unnecessary expenses and stay financially stable and competitive in the ever-changing market. They should be aware of tax rates and regulations and conduct thorough research for effective sales tax planning and budgeting.
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Special Provisions and Exemptions
Exemptions and special provisions also impact sales. Some services and products can be exempted from sales tax. Also, there can be special rules for other services and products. Small businesses should be well aware of taxable and exempted products for proper tax collection and remittance.
Conclusion
Sales tax is a form of tax applied to the sales of goods and services as an indirect tax. This type of tax is mostly charged at the moment of purchase or exchange of goods or services. There are several ways sales tax can be implied which helps to categorise sales tax into different types such as manufacturers’ sales tax, wholesalers’ sales tax, turnover sales tax, use tax and more. However, the sales tax does have a great impact on small businesses from compliance costs, financial burden, added administrative duties, etc.
Also, Read – What Is Sales Tax?
FAQs
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What are some most common sales taxes for small businesses?
Some common sales tax for small businesses can include gross receipt tax and turnover tax. Plus, specific products may have special taxes, like the exercise tax.
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How to mitigate sales tax?
Various methods can help to mitigate sales tax for small businesses. Some best ways to do that is by using invoices, technology and other new facilities for sales tax management, and conducting periodic sales tax audit
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How does tax planning help small businesses?
Tax planning is crucial for small businesses. It is an effective way to lower costs and increase profitability. Therefore, small businesses must plan their taxes properly.
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What is Vendor tax in sales tax?
Vendor tax refers to the tax amount charged from a small-scale or large-scale business for operating a business in a state. This tax is then further remitted to the tax authorities by the vendor.
