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Sales Tax and Retail Licenses
I am finally ready to add retail sales to my massage practice. What do I need to know about sales tax and retail licenses?
Dealing with sales tax is one of the biggest concerns therapists have about product sales. Visions of stacks of paperwork and endless reels of red tape take over their thoughts. Yet collecting and remitting sales tax is quite easy to do once you have the proper licenses.
Most states require that you collect sales tax on products that you sell, although certain food-based products are exempt. Many cities and counties impose additional local sales taxes. These tax rates range from less than 1 percent to more than 10 percent. Luckily, states provide easy-to-read charts that list the local tax rates.
Technically, you are not required to “collect” the taxes, but that is the amount you must remit to the government. If you don’t charge your clients the sales tax, that money comes out of your pocket.
For instance, the state sales tax rate in Arizona is 6.6%. There are 89 cities in Arizona, each with its own additional local sales tax. There are a total of 23 different sales tax rates throughout this state. The city of Tucson, AZ charges an additional 2 percent sales tax. Thus, if your practice is located in the city of Tucson, you must collect 8.6 percent sales tax on products sold.
Sales tax is calculated by multiplying the purchase price by the applicable tax rate, and is collected by the seller at the time of sale. Continuing on with our example, if you sell $1000 worth of products in Tucson, you must collect $86 in sales tax.
Licensing Requirements
You need a Transaction Privilege Tax License if you live in a state that requires you to collect and remit sales tax. Sometimes, that license is bundled with a Business License. Keep in mind that in most states a Business License is not the same as an Occupational or Professional License. Many states don’t even require service businesses to have a Business License; you only need to apply for a Transaction Privilege Tax License.
The U.S. Small Business Administration (sba) has a great website for finding licensing requirements. Its Business Licenses and Permits Search Tool allows you to search by location (city, state or zip code), combined with your type of business. Massage is one of the 15 types of business listed! Once you put in the information and click “Search” you get a results page that lists the federal, state and local permits, licenses, and registrations you need to run that business. It also provides links to web pages, contact information, application forms and instructions.
FindLaw has another way to explore licensing. You select your state from a map and it links you to the appropriate website where you access information on how to obtain business licences and permits.
Whether you do your research online, in person or over the telephone, be sure to contact your city orcounty Business Licensing Division for their requirements. The government rules and regulations can change at any time.
For example, until a few years ago in Tucson, Arizona, you applied for a city Business License (with an annual renewal fee) and then, if you sold products, you applied for a separate Transaction Privilege Tax License (which was a one-time fee of $12 paid to the state). Currently, you have the option to get a business license that allows you to sell products or one that is just for services. Yet in most cities in Arizona, businesses need a separate Transaction Privilege Tax License.
If you have any difficulty getting the information you need from the above sources, go to your State Department of Revenue (DOR) website. I searched a couple of different states and found that the DOR websites had the most complete, clear information-and included local requirements too.
Necessary Information
Compile the following information before filling out the Transaction Privilege Tax License form:
- Business name
- Business entity (e.g., sole proprietor, LLC, PSC) and date it was established
- Employer ID Number (federal business tax id), or Social Security Number if you are a sole proprietor with no employees
- The starting date for collecting sales tax in your state
- The type of products or services to be sold
- The amount of sales tax you estimate you will collect
- If you have more than one location, whether you will be filing consolidated returns
Reports
How often you must submit reports and the collected sales tax vary. Usually you are required to fill out a form on a monthly basis for the first year. If the volume is low, the state might reduce it to quarterly or even annually. Remember, that while it is called state sales tax, the percentages usually vary by the type of taxable activity and the city.
Also, if you purchase products to resell, you don’t need to pay sales tax to the companies that sell you the products. The companies from which you purchase products often ask for your resale number (which is on the Transaction Privilege Tax License).
Once you know the sales tax rate you need to charge, you are on your way! If you use an accounting or office-management software program, it should calculate the amount of sales tax to charge for each sale and prepare your sales tax reports. Many of these programs also track your inventory so you can be automatically reminded when a stock level is getting low and they can output a variety of reports for using to track sales trends.