Are You Subject to Sales and Use Tax?

Are You Subject to Sales and Use Tax?

Sales Tax Calculation

You have started a new business and you are wondering, do I have to collect and pay sales and use tax?

In Virginia, Sales and Use tax is to be collected and paid on the sale, lease, or rental of tangible personal property, or on the use or consumption of tangible personal property.

That means if you are selling physical or tangible pieces furniture, artwork, vehicles, or other property, then the sale is subject to sales and use tax. In Virginia, the standard sales tax rate is 5.3% (4.3% for state and 1% for local) or for Northern Virginia 6% (5% state and 1% local) and eligible food items are subject to 2.5% tax (1.5% state and 1% local).

What if your main business isn't making or selling tangible property? Do you still have to collect and pay sales tax? That can depend on couple of things. Are you a non-profit, contractor, or a professional service provider (photographer, accountant, lawyer, consultant etc)?

  • If you run a non-profit you may be exempt from not only paying sales tax on purchases but also be exempt for collecting sales tax on the sale of tangible property.
  • For Contractors, you are generally exempt from collecting sales tax on services when preforming construction, reconstruction, installation, repair, or any other service with respect to real estate or fixtures there-on, but you are required to pay sales tax on the purchase of the tangible personal property used to preform the service.
  • So what if you don't fall into one of those special classes? You have a couple of things to consider.
    • First, do you separate you labor cost from other cost on your invoices?
      • If you do then those labor costs are not subject to tax if they are directly related to the installation of the tangible property.
      • The tangible property is still subject to tax.
    • Second, what is the object of the services?
      • Is the object to install or provide to the customer tangible personal property or is it to provide a service?
      • For example, if you are an CPA and prepare tax returns, do you also provide the client a hard copy of the return?  If so is the objective giving them the paperwork or filing the return?  In that case it would be filing the return which is a service and thus, not taxable.
    • Lastly, is the tangible property incidental to the service?
      • For example, if you are a photography business and you give your clients all of their photos electronically but provide them a couple of their favorite prints, those prints would be considered incidental and not subject to tax.

As you can see, finding whether you are required to collect and submit sales and use tax to the state of Virginia can be complicated.  It depends on a lot of different circumstances and varies based on the objective and types of services provided.  Luckily, with proper use of software and its implementation, collecting, tracking, and filing sales tax can be made easier.

Hopefully the above information is helpful. If you need assistance in finding and implementing software for this purpose or have any specific questions, then please contact Walston Advisory Firm.

Email: info@walstonadvisoryfirm.com 

Phone: (434) 515-1669.

How To Keep Business Information Safe Online

How To Keep Business Information Safe Online

How the IRS vs. How the Law Views Your Business

How the IRS vs. How the Law Views Your Business