Navigating the Complexities of Sales Tax: A Guide for Beauty Professionals
The thing about sales tax is that it’s different in every single state! We’ll discuss some good general advice below concerning LLC Formation, Sales Tax ID’s, Unregistered Sales Tax, Retail, and Late Filing Penalties, but full disclosure, it’s important to discuss these specifics with your accountant to make sure that you are following your state’s specific rules and criteria when it comes to sales tax.
3 Common Sales Tax Mistakes Beauty Pros Make
Selling retail is one of those responsibilities that comes with being a beauty professional, but it’s important to make sure you’re following the guidelines correctly. There are three common mistakes that beauty pros make when it comes to retail and sales tax.
- Not Charging Clients Sales Tax: The state wants the tax on the final product purchase, not the initial purchase. If you pay $10 for a wholesale product and then charge your client $20, the state wants the sales tax on the $20. If you don’t collect sales tax from your clients or if you don’t collect enough, you’re still on the hook for the full tax liability. Ouch!
- Paying Sales Tax Twice: You should only be buying wholesale retail. If your vendor has been charging you sales tax when you buy a retail product, check with them to see what kind of documentation they need to allow you to purchase wholesale. Usually it’s as easy as a copy of your sales tax certificate. And remember this is ONLY for retail – when purchasing any back bar, you are the final purchaser and should be paying sales tax on those products. For this reason it’s best to make two separate purchases for back bar and retail.
- Not Putting Your Sales Tax To The Side: Sales tax is not revenue for your company when it’s collected and it’s not an expense when it’s paid out. As a beauty pro, you should be setting aside sales tax funds collected from clients into a separate tax savings account so that the money is ready to go. You are basically transferring what your clients paid in sales tax over to your state, so there’s no business expense. States are aggressive about collecting sales tax so don’t accidentally spend it!
LLC Formation Requires A New Sales Tax ID
Here’s the deal. If you started out your business as a sole proprietorship and then transitioned into an LLC, you’re going to need a new sales tax ID. Sadly, it doesn’t transfer to the brand new legal entity. I like to use this analogy to help it make more sense – just like siblings do not share the same social security number, businesses can’t transfer tax ID’s. I personally have always recommended beauty pros to start an LLC from day one because of issues like this.
And if you’re thinking, that’s too much work, I’d rather just stay a sole prop…I’d tell you, if you are looking to grow your business while maintaining legal protections that is not a smart choice. Click here to read my blog on LLCs and S-Corps to learn more about the benefits of forming an LLC and its potential for growth. If you want all the legal protections that an LLC provides, you will need to:
- Get a new EIN number
- Get new bank accounts that are only ever used for business transactions
- Update your credit card processor with your new EIN
- Update your payroll tax ID numbers (if you have them)
- Get a new sales tax ID number that goes to your new LLC
Can I Collect Sales Tax Without Registering For a Sales Tax ID?
If you have your sales tax ID set-up, this shouldn’t concern you. If you haven’t registered with your state, listen up! Please be aware that collecting sales tax when you haven’t registered with your state is illegal. In most states you’re only going to be collecting sales tax on retail sales, but keep in mind, you can’t file a sales tax return and pay the tax without having an account set up with your state!
Did you know that registering in most states is super easy? You’ll complete an online form that takes about 30 minutes or less asking for information like:
- Business name
- Business address
- Business EIN Number
- Owner information
Expected sales subject to sales tax.
Late Sales Tax Filing & State Estimation Penalties
Before we get ahead of ourselves here, know that even if you had $0 in sales, you need to file a sales tax return. I can’t tell you how many beauty professionals have gone through the process of getting their sales tax ID set up and then forget to file their sales tax returns. It’s a standard procedure that just has to be done and let me tell you, you don’t want to file late.
In some cases, the states will estimate what they think you sold in retail and then send you a bill for that estimated tax amount. The problem is that they generally tend to overestimate this amount and it can be more than what you generally owe. Good news is that most states have an easy online account portal that you can log into and file the past due return. Once you file the real tax return with the real balances, it will override the estimate that the state sent to you. Make sure to pay the real bill that you calculated and then you’ll be good to go. It’s important to keep sales tax returns on your regular radar especially because if you haven’t been selling much retail, it can be really easy to forget. In most cases the penalties aren’t too bad for filing late, but it’s super important to catch up if you do happen to be behind. If you don’t file the returns, the state can cancel your sales tax account and then you won’t be able to sell retail anymore.
How Do I File My Sales Tax Returns?
The due dates vary according to your state. Once your registration is approved, your state will send you a letter with your ID number, filing frequency, and return due dates. Make sure to put it on your calendar so you don’t forget to file. We’re here to answer any questions you may have about your taxes, and we’d love to help you figure out sales tax guidelines specific to your state! If you would like a personal assessment on your business, we’d love to chat.