Going Into Business, Part II
Peter VanderWoude, CPA, CGMA
July 1, 2017
Last month we covered the income and self-employment tax ramifications of going into business as a sole proprietor. The key takeaway from that article is that a change of mindset is needed when a person makes the transition from employee to business owner. This month we will go over another area where I have seen misunderstandings: Sales Tax.
Most of the time when a person goes into business money is tight. The new business owner tries to save money by “going it alone” and not seeking the counsel of a professional. These new business owners are generally aware of what in their business is subject to sales tax, but they may not have set themselves up properly to collect and remit that sales tax. This can lead to $10,000 penalties from the state that can sink or damage the fledgling business.
What are some misconceptions I have heard from soon-to-be new business owners? “If you pay sales tax to a vendor you buy items from and then have your customer reimburse you, aren’t you in the clear?” No! “Isn’t sales tax remitted to New York State through one’s income tax return?” No, no, no! “Sales Tax Certificate of Authority…what’s that?” Oh, Oh!
The sales tax that you collect is not your money! As a business owner, you are collecting the sales tax as an agent for the state. You must register with New York State—if you are required to collect sales tax—at least 20 days before you begin selling goods and services. You must obtain a Sales Tax Certificate of Authority and display it in your place of business. You cannot accept or give out sales tax exemption forms without having obtained the certificate of authority. You are required to file a sales tax return and remit sales tax collected usually on a quarterly basis, but sometimes on a monthly or annual basis depending on volume of sales tax collected. You may obtain a credit for sales tax you paid to vendors for goods that you sell to your own customers.
What if you have already started your business and it is not set up properly for sales tax? If the state has not already notified you of your violation, you may be able to use the New York State Tax Department’s Voluntary Disclosure and Compliance Program to avoid penalties. If approved, you must immediately file all delinquent sales tax returns and pay the sales tax owed with interest due.
The administrative burden for business owners is complex and time consuming. It is best to set up your business properly from the very beginning, rather than as you go. See your tax advisor a few months before you start your business. Maintain good records for all sales transactions and place sales tax collected in a separate bank account. With proper setup and systems in place, you can devote more of your focus on what you are in business for in the first place—serving your customers and being rewarded for it!