Amy has a master's degree in secondary education and has taught math at a public charter high school.
After reading this lesson, you'll have an understanding of how businesses deal with sales tax. You'll also learn how a business calculates sales tax and pays it to the state.
Have you ever wanted to start your own business? Perhaps one where you sell stickers to your friends? Well, let's pretend that you have your very own business selling hundreds of stickers each week to your friends and their friends. As a good business person, you keep accurate records of your sales and make sure you're collecting the right amount of sales tax.
Sales tax is the percentage of each sale that is due to state and local governments. Each state and local government sets its own percentage. For example, as of 2017, the state of California has a base tax rate of 7.25 percent. In addition to the statewide tax, each county adds an additional percentage ranging from 0.10 percent to 2 percent. In Los Angeles County, that rate was 1.5 percent in 2017. As you make your sticker sales, you keep detailed records of each one, including those sales made both in and out of California.
Sales Tax Permit
As you live in and are selling your stickers in the state of California, you have a sales tax permit, a requirement that allows businesses to sell and collect sales taxes on products or services. This permit also facilitates the way you pay your taxes to the state of California. Some, but not all states require sales tax permits. Each state also has different filing requirements for sales taxes, such as monthly, quarterly, or yearly reporting.
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In California, your stickers are a taxable item. For example, let's say your friend buys $12 worth of stickers from you in Los Angeles. Because this sale was made in Los Angeles County, the sales tax you collect is 8.75 percent of $12 (7.25 percent in state and 1.5 percent in county tax). Here, $12 * 0.0875 = $1.05. You make a note next to this order that you collected $1.05 in tax for a sale made in Los Angeles. You hold onto the tax until you file again for your sales tax permit. In most states, everything that is tangible, or a physical product, is taxable. Check with your state to see what types of services are taxable or not.
Sometimes you sell your stickers to friends from other states. When this happens, you don't charge any tax, because our-of-state sales are tax exempt in California. Wholesale orders are also exempt in California. So, whenever you sell your stickers at a discount to a retail store that later sells your stickers to its customers, you don't collect any sales tax. Each state also has its own rules regarding exemptions. You can find this information in the sales tax permit for each state.
Let's review. Sales tax is the percentage of each sale that is due to your state and local governments. Each state and local government sets its own tax rate. It's the responsibility of a business owner to collect and pay sales taxes. Depending on your state, you may or may not be required to apply for a sales tax permit. A sales tax permit allows businesses to collect taxes on products and sometimes services. In some states, physical products are usually taxable. Out-of-state sales, wholesale orders, and services may be tax exempt. Check with your state and local governments first to make sure that you are following all their rules regarding sales taxes.
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