Lessons Learned: North Carolina Sales and Use Tax March 30, 2017 05:00
As we have mentioned before, starting a business means you end up wearing a lot of new hats. Some are enjoyable and fulfilling and inline with why you starting your side hustle to begin with, others are more frustrating and take a lot of time because they are outside of your personal strengths.
Luckily since we are a partnership we can delegate 'new hats' based on our different strengths. And also luckily, our strengths don't overlap too much, so we can pretty evenly divide and conquer. The bulk of the business administrative side falls in my, Mary Beth's, wheel house. One of those pesky items is taxes. Today I was going to share what I've learned thus far regarding North Carolina Sales Tax, or more accurately "Sales and Use Tax".
I've set this post up as a question and answer that walks you through the process and answers some questions about North Carolina sales and use tax. If you have any additional questions, comment on this post or shoot me an e-mail. I'm no expert, the breadth of my knowledge is limited to how these taxes apply to our specific business, but I can help you find your answer, or point you to some resources that will help.
What is sales and use tax?
The North Carolina Department of Revenue overview:
"The general State and applicable local and transit rates of sales and use tax apply to the sales price of each item or article of tangible personal property that is sold at retail, sourced to this State, and is not subject to tax under another subdivision in N.C. Gen. Stat. § 105-164.4. Tangible personal property is defined in N.C. Gen. Stat. § 105-164.3 as "personal property that may be seen, weighed, measured, felt, or touched or is in any manner perceptible to the senses. The term includes electricity, water, gas, steam, and prewritten computer software." The general sourcing principles are set forth in N.C. Gen. Stat. § 105-164.4B.
In those instances where the appropriate sales tax has not been paid on taxable tangible personal property, a use tax applies to the tangible personal property purchased or received from within or without this State for storage, use, or consumption in this State."
Who should file sales and use tax in North Carolina?
Based on North Carolina law, every individual or business 'engaged in business' in North Carolina is required to collect and pay sales and use tax on retail sales or leases of tangible personal property and certain digital property not specifically exempt by law. Some services are also taxable. When they say 'engaged in business' I associate this with a physical presence. We live and are part of the business community in North Carolina. Most other states are similar. So we collect sales tax on every product purchased at a North Carolina show/pop-up (currently we do not have shows outside of North Carolina, that will be a new obstacle this year). For those of you coming to North Carolina to participate in a market from out of state, even if you don't have a brick and mortar in North Carolina, you are still required to register with the Department of Revenue and pay sales tax. You can read more about the specific requirements for 'specialty markets' here.
In regards to our online sales (includes sales directly from our website, Amazon, or Etsy), the tax required is based on the billing/shipping address of the recipient. So if the recipient is in North Carolina, we collect sales tax. If the recipient is in another state, where we are not 'engaged in business', we do not collect sales tax. The tax on that merchandise would be the responsibility of the purchaser as a use tax as required by their respective states.
For all of our products sold in local shops the retailer collects and files sale tax.
What is the difference between sales and use tax?
As indicated in the overview from the department of revenue above, sales tax is a tax collected on the sale price of each item or article of tangible personal property that is sold at retail, in this case specifically within North Carolina. Most people deal with this everyday, so it is easy to wrap your head around. Use tax is a little more tricky. The department of review defines use tax as "a tax due on purchases, leases, and rentals of tangible personal property and certain digital property purchased, leased or rented inside or outside this State for storage, use, or consumption in North Carolina." If you break it down it is tax owed by the purchaser of an item when the North Carolina tax has not been collected by the retailer.
An example of when we at UPstudio have to pay a use tax: When we get cards printed by our local printer we have to first purchase the cards from them. When we purchase cards we do not pay sales tax to the printer because we are purchasing them with intent to to resale (we provide them an E595-E form for the exemption). If we were to pay sale tax on the card, and then our purchaser also pay sale tax on the same card, that would be double taxation. So, we only collect and pay sales tax on the cards sold. But all of the cards we 'use'/consume ourselves, give away, or can't sell due damage or other reason and thus we store, we have to pay a 'use' tax on them. Since the retailer, or our printer, did not collect sales tax from us initially, it would then be our responsibility as the purchaser to pay it as a 'use' tax on the cards we are not reselling. The use tax is based on our purchase price from the printer.
What are the current sales and use tax rates?
This webpage gives the current sales and use tax rates. Use tax is calculated at the same rate as sales tax. How sales tax is broken down is that you have a state rate and a county rate. The state rate currently is 4.75% and each county varies, refer to this document for the current county rate. Make sure to note the footnotes regarding additional county transit taxes. Wake County approved an additional 0.5% transit tax starting April 1, 2017. To simplify it a bit, you can reference this page to look at the total sales tax (state and county combined) for each county. But note that when filing your sales and use taxes there are separate line items for the state portion and each county portion.
When do you file sales and use taxes?
If the tax owed is between $100 and $20,000.00 a month you must file it monthly on or before the 20th day of each month for all taxes due for the preceding calendar month.
If you aren't a high roller, and fall in our category of less than $100 of taxes due a month you can file quarterly. These returns are due on or before the last day of January, April, July, and October for the preceding three-month period. You can read in more detail about when to file here.
Their website also released a directive stating that "North Carolina will consider any tax payment with a due date on a Saturday, Sunday, or legal holiday as being timely paid if delivered in person or mailed to the Department on the next business day after the Saturday, Sunday, or legal holiday." You can read more details here.
How do you file sales and use taxes?
You must first register your business with the North Carolina Department of Revenue. This is pretty simple on their website. You will get your sales and use tax account ID immediately upon application. They will also send you a certificate of registration which you are required to present to patrons at local markets/pop-ups.
We file our sales and use tax online electronically through the state's e-file system. You can access the system here. In preparation to file electronically make sure that you have all of your gross receipts for the month/quarter. Make sure that each receipt is broken into product price, state tax collected, and county tax collected. You'll be asked to break it down per county on the form. Also make sure that you have your sales and use tax ID number and your Federal Tax ID or EIN handy.
I've tried to cover the basics, hopefully this will help you start to understand how sales and use tax works and whether or not you should be collecting and paying it. There is plenty of additional information on the North Carolina Department of Revenue website, just follow the links provided within the post above. Please reach out to me if you have any additional questions or if something I said didn't quite makes sense.