Sales and Use Tax for Cleaning Companies

We are all familiar with what sales tax is. You go to the store, restaurant, bowling alley, auto repair shop, wherever, and added on your receipt is that extra chunk of money known as sales tax. Yes, your state government needs to build roads, plow snow, pays its employees, etc. Each state sets its own sales tax rate, and even then, many large cities and counties tack on additional taxes above and beyond the regular state tax. Transportation tax and taxes on food and beverages are common ones. There are five states which charge no sales tax, namely Alaska, Oregon, Montana, New Hampshire, and Delaware.

Ok, pretty easy to understand, right? As a business owner, you are familiar with paying the sales tax you have collected from your customers to your state government, usually on a monthly basis. (One side note, some states do not charge sales tax on services, so check with your department of revenue for clarification). In doing so, I'm sure you have run across the term "sales and use tax." So what the heck is that?

Well, the "sales" part of sales and use tax is just that: the same "sales tax" we have been talking about. But what is "use tax?" Without getting into too many details, terminologies, or laws, we are going to define "use tax" as a substitute tax charged when you purchase goods and services from your state or another state where no sales tax has been charged. Probably the easiest example of this is one we are all familiar with: buying items on the internet.

We have all bought something on the internet from another state, oftentimes with the sole intent of not having to pay sales tax. Heck, that's like getting a discount, right? No sales tax? That's money in the bank, right? WRONG! You may not have had to pay Amazon any sales tax for that new Harry Potter book, but that does not mean you do not owe it. Rather than pay Amazon the state "sales tax" they have in their state, you are required to pay the "use tax" which your state has. This is almost always the same tax rate as the sales tax. In the case of internet purchases, the vast number of transactions makes it next to impossible to gather sales tax from purchasers, because each state has a different tax rate, and to charge different rates for different states is a bookkeeping nightmare.

Now the burning question is "What does this have to do with me and my cleaning service?" Well, one way it applies is pretty self-explanatory based on what you have just read. If you are purchasing supplies and equipment on the internet or are traveling across the state line to a lesser-taxed state to buy supplies, you are subject to the state "use tax" for your particular state. Let's say you go to another state where the sales tax rate is 6%. Your state has a sales tax rate of 8%. If you paid the 6% sales tax on the goods purchased, you still owe 2% use tax to your own state. You must report and pay taxes on these items. Just remember you cannot "get out of" paying your state taxes! Also keep in mind, in some states, services are not taxable, so be sure you know your state's laws.

Another instance you need to be aware of is when you are doing business in another state. As you are starting out, this probably won't apply to you, but it may. If you are doing business in a city which lies on a state border, you may very well be doing business in the adjoining state (e.g. Kansas City, Missouri and Kansas City, Kansas) In these cases, you need to charge the tax rate for the state where you perform the work.

Many janitorial companies buy supplies like toilet paper, hand towels and soap from their janitorial distributor with the intent of re-selling these items to their customers. In this case, you would fill out a certificate of exemption and give that to your supplier to keep on file. Check with your state's department of revenue for the form. Your supplier will not charge sales tax when you purchase these items because you will be responsible for charging your customers the sales tax when you sell them the inventory. Keep in mind, you will also owe use tax if you take items out of inventory for your own use. Since you are not collecting the sales tax from your customer, you must pay the use tax on any items you take out of inventory since you did not pay the sales tax to your distributor at the time of purchase.

It is very easy to just ignore or "accidentally forget" to pay taxes on these items, but please don't. It is not only the law, but it also puts you into an ethical mindset that you want to have in operating your business. I firmly believe that you need to be honest in all your business dealings. This attitude will be reflected in how you are perceived by your clients, vendors, and employees. The truly successful businesses are not the ones who try to shave a few dollars off their tax obligations. In addition, every state performs sales and use tax audits. If you have not been paying your taxes, you will end up paying them anyway, along with interest and penalties. Visit your state's Department of Revenue for detailed explanations and resources available to assist you.

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Jean Hanson helps owners of small cleaning companies build a more profitable and successful cleaning business through her online community at TheJanitorialStore.com. Read inspirational cleaning success stories at http://www.cleaning-success.com, and sign up for weekly cleaning tips at //www.thejanitorialstore.com.