Taking Care of Business
Today was time for some especially gruesome business-related work. I knew I was overdue for collecting California state sales taxes on Floppy Emu sales, and my recent investigations into having an electronics assembler build the boards brought some new urgency to this issue. Without a California seller’s permit and resale certificate, I would have to pay sales tax on the entire order from the assembler, because they’re also in California. In fact, I’ve already been paying sales tax on all the parts I’ve purchased from Digi-Key and other electronic component vendors. That stinks, because in theory I shouldn’t need to pay sales tax on parts I purchase that are later resold to other people. But avoiding the tax requires having the proper paperwork, and also means collecting sales tax from California residents who buy a Floppy Emu.
After a highly-extensive (ahem) 90 minute Google search, I found that setting up all this sales tax craziness wasn’t nearly as difficult as I’d feared. My new best friends at the California State Board of Equalization were there to help (and to make us all equal, apparently). I was able to apply for a seller’s permit online, and was approved immediately. From there, I can fill out resale certificates with my permit number, and give them to the suppliers from whom I purchase parts. Voila, no more sales tax!
Of course it’s not all flowers and smiley faces… I’m now responsible for regular filing of a California sales and use tax return, form BOE-401. But because I’m a small business with low revenues, I can file the “EZ” version of this return, which is only one page long. Essentially all I need to do is state my gross revenues, and the amount of revenues exempt from sales tax because the buyer is outside California, then multiply the taxable remainder by the state sales tax rate to determine how much I owe the state. What could go wrong? Probably a lot of things, but at least it looks simple on the surface.
The other half of this deal is that I now need to collect sales tax on purchases from California residents. I’ve had surprisingly few of those – Australia has bought far more Floppy Emus than California, for example – but it’s a requirement with the potential to introduce new headaches. Fortunately in this case, PayPal makes it very easy to collect sales tax from the right people. It took less than 60 seconds to reconfigure my ordering page to charge sales tax for buyers with a California shipping address.
You might be wondering how much the California sales tax rate is, and that’s a good question. As it turns out, it’s different depending on where you are in the state! The state itself collects 7.5%, but most counties and cities add a few percent more on top of that. Technically I think I’m supposed to charge a different sales tax rate to different California buyers depending on which county they’re in, but forget it. Where I live, it’s 9%. Hey, this is Silicon Valley, and we like our highways gold-plated and our fire trucks rolling with diamond bling! Or maybe it all just goes to subsidize jet fuel for Google execs, I don’t know.
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The minimum (general) VAT in the EU is 16% and here in Denmark it is 25%, which is the maximum allowed in the EU. 9% is a long gone dream.
(Why does the EU care about the VAT rates? Partly because the EU gets some of its funding from the VAT.)
True, I believe tax rates are generally higher in Europe than the in the US. But you have to look at all the relevant taxes, not just sales tax (or VAT). In California, there’s also a state income tax of about 10% (varies by income level), then everyone pays the US federal income tax of about 30% (again varies by income level). If you have “earned income” from a job, you’ll also pay social security tax of 6.2% (10.4% if self-employed) and medicare tax of 1.5% to 2.0%. (2.9% if self-employed). Add it all up, and your marginal tax rate can exceed 50%.
back in the 1970s, we had the situation where VAT in the UK was at two different rates, one for ordinary goods and another, higher rate for “luxuries”. I think they were 8% and 25%. So that led to a long list of luxury items that were charged at the higher rate, but they included electronic things like colour TVs. If a vendor sold a resistor, say, should they charge 8% (if it was for a radio) or 25% (if it was for a colour TV)? Or if you’d bought a resistor with 8% VAT and kept it as a spare, and subsequently fitted it to a colour TV, do you go back and pay the rest of the tax?
That sounds like a mess. Yeah, the whole (sales) tax system seems confusing, and ripe for fraud. There doesn’t seem to be any check of the resale certificate permit number when buying something tax-exempt from a vendor, nor is the purchase ever filed with the government as far as I can tell. So somebody could fill out a resale certificate with a made-up 10 digit permit number, submit it to the vendor, and buy stuff tax-free. Or you could get a valid resale certificate and use it to purchase personal stuff tax-free, instead of items meant for resale.
Then there’s the whole use tax system, which is like the flip side of sales tax. If you buy something in another district or state with no sales tax, or a sales tax rate lower than your home state’s, you’re supposed to pay a “use tax” equal to the difference. In practice I think hardly anybody ever does that.
Differentiated VAT rates are quite common in the EU. Fruit and bread and whatever else is deemed basic goods may have a reduced rate. Or some items may have no VAT at all. Danish newspapers have no VAT on them, for example. That’s one of the ways we subsidize them.
We subsidize newspapers and other media because there aren’t that many Danes and we want a thriving media business for cultural and democratic purposes. Of course, the only two really good newspapers have had their subsidies reduced and almost lost them several times 😉
(Weekend-avisen, a high-brow weekly that includes honest to god numbers and graphs in their political and economic analyses. And they have actual economists writing for them.
Ingeniøren, a weekly for engineers, loosely associated with their union, which does the only proper analyses of infrastructure, the environment, pollution, energy, and big state projects.)
I was apparently wrong: the lowest is 15% (Luxembourg) and the current maximum is 27% in Hungary!
15% is the lowest allowed by directive 2006/112.
It is all a bit of a mess for cross-border business 🙁
I just got approved for a seller’s permit and I have noticed that the account number section is blank. Do they send you another copy with the information printed on it? I have seen many permits with the info already printed on. Sorry for the beginners question, still very new to the wholesale idea.
Mine shows an account number on the government web site, but when I click to see what’s supposed to be the actual permit certificate, the name and account info section are blank. I never got anything in the mail either. I gave the account number to a few suppliers, and it seems to be fine.