I am asked more questions about sales tax than any other topic. For something that should be so simple, the sales tax laws are terribly complicated. Here in North Carolina, the law is even more complex, as each county can set its own sales tax rate. How can you be sure you’re handling sales tax properly?
Understand which of your products and services are taxable.
First and foremost, it’s important to know if the products and services you’re selling are subject to sales tax. The law in North Carolina changed as of January 1, 2014, so be sure you check the list of taxable items to be sure you’re in compliance. Details can be found at the NC Department of Revenue website.
Know the county rates.
As I mentioned above, the sales tax rate in North Carolina varies from county to county. The state imposes a 4.75% sales tax, and counties add an additional tax between 2% and 2.75%. The sale is taxable based on where it takes place. If your business is based in Wake County but you travel to Durham County, you must collect sales tax based on the Durham County rates. The Department of Revenue has a handy reference sheet online that breaks down the sales tax rates by city or town. This listing can be found at http://www.dor.state.nc.us/downloads/sales.html. Scroll all the way to the bottom and download the “Gen 562” listing.
Calculate the tax correctly.
In many situations, sellers don’t add tax to the gross price. Think of a craft show, where it would be much easier to sell a $50.00 item for $50.00 instead of $53.38. Absorbing sales tax in your ticket price doesn’t eliminate your tax liability! You still owe the tax, but now you must deduct it from your sales. How do you calculate how much you owe? The easy way to do this is to divide the total sale amount by 1 plus the sales tax rate. Using the common 6.75% North Carolina rate, you would divide $50.00 by 1.0675. This gives you income of $46.84 and sales tax of $3.16.
File your returns on time – even if you have no taxes to report.
When you register for a sales tax account with the Department of Revenue, you will be assigned a reporting frequency. Your filing frequency will either be monthly or quarterly, based on your expected sales volume. It is important that you don’t miss a filing deadline, as failure to file penalties can be significant. Even if you have no taxable sales for the period, you still must file a “zero” report. If your sales increase, your filing frequency may change, so be sure to pay attention to any notices you receive in the mail.
Remit all taxes collected.
From time to time you may find that you miscalculated your sales taxes and collected too much from your customer. You must turn this money over to the state as part of your tax payment. Line 14 on NC Form E-500 allows you to indicate excess tax collections. You should report the extra amount here and pay it to the state.
Know the county rates.
As I mentioned above, the sales tax rate in North Carolina varies from county to county. The state imposes a 4.75% sales tax, and counties add an additional tax between 2% and 2.75%. The sale is taxable based on where it takes place. If your business is based in Wake County but you travel to Durham County, you must collect sales tax based on the Durham County rates. The Department of Revenue has a handy reference sheet online that breaks down the sales tax rates by city or town. This listing can be found at http://www.dor.state.nc.us/downloads/sales.html. Scroll all the way to the bottom and download the “Gen 562” listing.
Pay the tax.
If you only take away one bit of information from this post, this is it. Failing to collect sales tax will eventually get you into trouble, but collecting taxes and failing to send them to the state could land you in jail. Sales tax is a “trust tax.” This means you have collected it from the consumer on behalf of the state. Payroll taxes that are withheld from a check are another form of trust tax. Collecting this money from your customers but not paying it to the state is a crime. Although there are a few folks out there who willfully steal the sales tax they have collected, the more common scenario involves business owners who forget to file for a few periods. By the time they realize their mistake or get around to filing, the taxes have added up and so have the penalties and interest, and now they are unable to pay. I’ve seen this happen a few times, and the fees can add up quickly. Your best bet is to stay on top of the filing dates and pay the taxes on time. If your sales are significant, it may be a good idea to open a separate bank account where you keep your tax dollars so they are always available when it’s time to file.
Get support.
If you are having difficulty understanding the tax form or aren’t sure you’ll remember to file on time, it may be useful to hire a professional. An accountant can simplify the process for you and ensure your filings are completed correctly and on time.
Lori Aveni is the owner of My Shoebox Bookkeeper LLC, providing bookkeeping, payroll, notary, and tax services to small businesses throughout North Carolina. She is a Certified Intuit QuickBooks ProAdvisor. She lives in Apex with her husband and two sons. For more information, you can find Lori at the following links: My Shoebox Bookkeeper LLC, Twitter, Facebook, Vend Raleigh
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