Common Myths About Sales Tax

Sales taxes can be a confusing thing. Everyone knows that they have to pay them, though few people are actually clear on the rules and laws surrounding them.

In fact, many people believe a lot of things about sales taxes that just aren’t true. Read through our list to make sure that you’re not falling for any of the commonly believed myths surrounding sales taxes.   

The Car Buying Myth

A lot of people have bought into (literally) the myth that, if they buy a car in a sales-tax free state and then take it back to their own state where taxes prevail, they can skip out on the sales tax.

While it would be nice if this myth was true, it’s not. There’s still a “use tax” involved, which is taxed at the same rate as the sales tax in the state in which you eventually register your vehicle.

So, if you’re thinking about taking a long trip to a tax-free state just to buy a car, skip it. You’ll end up paying either way.

The Nonprofit Myth

Many people wrongfully believe that nonprofit organizations are exempt from relevant sales taxes, but just like the car belief, this one is a myth too.

The confusion comes into play because nonprofits are often exempt from federal income taxes, but sales taxes are a whole other animal.

Nonprofits have to pay sales taxes on purchases they make, and they also have to charge sales taxes on items that they sell.

These are actually just two of many common myths about sales taxes. So, before you believe anything you’ve heard about sales taxes, especially if it relates to not having to pay them, check with a financial professional to find out the truth.

Understanding Sales Tax

Most people pay sales tax, and most people, at the same time, don’t really know what sales tax is. To put it simply, sales tax is the tax that is collected by merchants. The merchants have to pay this money they collect to the IRS. Of course, this is not the case in every state, though it is in most.

Right now, 45 states collect state sales tax, and 38 states collect local sales tax. How much taxes different states collect and how much they charge in each category varies greatly from one state to the next.   

If you do live somewhere that requires you to pay one or both types of taxes on a regular basis, then you may find it smart to deduct sales tax payments when you file your federal income tax return. In order to do this, you’ll need to itemize your deductions, and then deduct your state income taxes or state sales taxes, not both. Since you can’t deduct both, it’s worth it to figure out which deduction will benefit you the most and then take that one.

For most people, the smartest option is to deduct state income taxes. However, that may not be the case if you’ve made big purchases in a place with higher sales tax or if you’ve paid more in sales taxes than income taxes. If you’re having trouble figuring out which situation applies to you and how best to file, remember that you can always seek help from a tax professional.

In fact, anytime you are trying to itemize deductions and/or deduct sales tax payments, it’s a good idea to speak with a professional. These tax situations can be tricky and difficult to handle on your own, which is why it’s always good to have input and help from someone who knows what they’re doing.

Want to Sell Online? Read this First!

These days, it seems like everyone is in need of a little extra money. And, more and more people are turning to online selling sites, such as Ebay and Etsy, to earn that money.  

 Getting those nice checks or Paypal funds from selling merchandise or handmade goods is certainly great, but remember, that money is subject to taxation too. If you forget that, you could face problems down the road. You could also face problems if you don’t figure your taxes correctly, which is why you need to know a few important things before you start (or continue) selling online.

To start off with, understand that if you are earning money, you absolutely have to report that money as business income. Not doing so could mean facing fines and penalties, so don’t take the chance.

Furthermore, you have to collect sales tax on your sales and also report any foreign sales that you have made.

Depending on the selling platform that you have chosen to use, you may have some help with these taxation matters. Amazon, for example, does require its sellers to complete an income tax identification form. Other sites, though, don’t report to the IRS and don’t keep track of your earnings, which means it’s up to you to handle your taxes legally and correctly.

The first step in doing this is typically to contact your state tax department to get set up to collect sales tax. Once you’ve done that, you need to keep careful records on each of your sales and your overall income.

If all of this sounds tricky and like a lot to keep up with, it’s because it is! However, doing everything “on the up and up” is definitely worth it since it will keep you from encountering troubling tax problems in the future. And, the good news is that you don’t have to figure all of this stuff out on your own. A qualified accountant can easily handle your tax issues for you or at least provide you with advice and guidance to help you do it on your own.

Thus, if you are planning to start selling online or to keep selling online but to do it legally, an accountant should be the very first person you contact.

Related articles

• These 5 states don't have a sales tax