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Why Start-Ups Should Get Tax Resale Certificates

There is no greater joy than owning and operating your own business. You look over your record-keeping and have a sense of well-deserved pride in your accomplishments of the past year. Then you remember tax season is looming over you like a dark shadow, and a knot of worry forms in the pit of your stomach.

Small and Medium-sized are both the lifeblood of our economy and a crucial part of the American Dream. However, most dynamic people who run these companies have neither the time nor proper understanding of the tax code to correctly prepare their business taxes, even with software assistance.

It might be tempting to shelve tax-related issues until April, but this is highly unwise. It is smart to have the right tax professional by your side from the beginning to look out for all the unexpected issues that often plague small business accounting.

Being An Entrepreneur Is Hard Work

There is no doubt that being a successful entrepreneur will require hard work and dedication. However, the younger generations are no stranger to working several jobs and/or side hustles and still barely making enough money to pay the bills. This is not a comfortable life and will quickly wear anyone down. Comparatively, you will be working hard in your own business but it will feel much more worthwhile. The money will be much more satisfying and you will be motivated and challenged in a whole new way.

Small Business Should Never Underestimate Taxes

The Internal Revenue Service has been more active in targeting small businesses for tax audits in the last several years. New businesses have spent 2.5 billion each year preparing taxes and answering questions from the IRS about tax return inquiries.

However, there are things that any new business can do to lessen its tax burden. We will discuss how choosing the right business entity can make your life as a new entrepreneur much easier in the coming future.

What is A Tax Resale Certificate?

You must understand that tax resale certificates can also be used on items that will be resold. Office supplies, such as new computers for your employees, would not fall under the category of retail.  It would be considered fraud not to pay sales tax on these items.

If this is confusing for you, just think of tax resale certificates as state tax exemption certificates.  Some states call them exemption certificates or reseller’s permits.

How Do I Know If I Need To Pay Sales Tax In A Given State?

To establish whether or not a state can impose a sales tax upon your business there first needs to be nexus. Nexus relating to state sales tax is established by a connection between the state and your business. How this connection is defined has been subject to fairly recent changes that reflect changes in the way business is conducted in modern times.

Traditionally, the nexus has been established by the business having a physical presence in the state. However, due to the explosion of e-commerce, physical presence within a state is no longer a requirement for sales tax nexus. In the case of South Dakota v. Wayfair, the courts eliminated physical presence as the major requirement for creating nexus. It still should be noted that physical presence is considered an important requirement to allow a state to collect sales tax and is still one of the first considerations for sales tax.

What Happens If I Do Most Of My Business In A State That I Am Not Incorporated?

If you primarily do business in a state that you are not incorporated in, make sure you apply for a Foreign Qualification (also known in some states as a Certificate of Registration or Certificate of Authority). This is the process of registering your company, which is considered domestic to the state in which it was originally formed and foreign to all other states, as a foreign entity in the states in which it operates. The retailer is then able to legally conduct business outside the state in which the company was originally formed and therefore should be able to apply for a tax resale certificate. 

Remember To Verify Any Tax Resale Certificate Presented To You

In the first part of our series, we mentioned that a vendor can refuse a tax resale certificate. This is because the vendor will be the one liable to the state government should anything be remiss. That is why you should always take the following steps to assure that anything presented to you is valid.

  • Make certain that the certificate is properly filled out and signed by the business owner
  • You should be able to verify the certificate online by using the certificate
  • You should also be able to verify online if the certificate has expired
  • Be aware of purchase that seems suspicious and does not relate to the customer’s business in a logical manner
  • You must keep the certificate on file for at least 5 years in case of a tax audit.

Being An Entrepreneur Is Hard Work

There is no doubt that being a successful entrepreneur will require hard work and dedication. However, the younger generations are no stranger to working several jobs and/or side hustles and still barely making enough money to pay the bills. This is not a comfortable life and will quickly wear anyone down. Comparatively, you will be working hard in your own business but it will feel much more worthwhile. The money will be much more satisfying and you will be motivated and challenged in a whole new way.

Small Business Should Never Underestimate Taxes

The Internal Revenue Service has been more active in targeting small businesses for tax audits in the last several years. New businesses have spent 2.5 billion each year preparing taxes and answering questions from the IRS about tax return inquiries.

However, there are things that any new business can do to lessen its tax burden. We will discuss how choosing the right business entity can make your life as a new entrepreneur much easier in the coming future.