The intent of this guide to help you quickly understand some key concepts related to sales tax and how they might impact your photo booth business. It's important to note: taxes in the United States can be complicated, making compliance painful for small businesses. Often some areas need interpretation. After reading this guide, you'll have a better understanding of several important concepts. You'll be better prepared to speak your accountant or tax advisor to develop a game plan for complying with the laws which apply to your business. You can also reach out to your local taxing authority for guidance.
Over the years, we've added several features to Check Cherry, our Photo Booth Management Software, to help customers easily comply with the requirements for collecting sales tax. From tax settings on each package/add-on to our integration with TaxJar, which allows you automatically calculated the proper sales tax rate based on the address of each booking.
Essential Sales Tax Concepts
Sale Tax vs Income TaxFirst off, keep in mind sales tax is separate from the income taxes you will pay each year as the result of operating your photo booth rental business.
Specifically, a sales tax is a consumption tax on goods and services — services such as providing a photo booth at a wedding or goods such as selling wedding party gifts to a bride. In the United States it is customary to have the sales tax paid by the consumer as a separate line item. As a business, you are effectively acting as an agent of the government and collecting sales tax from your customers. All monies collected will later be paid (remitted) to the government periodically. We'll cover more on remittance later in the article.
Because any sales tax you collect belongs to the government, it is essential one not use the money for personal or business expenses. Keeping the money is going to make fulfilling your obligation of remitting payment to the proper governing agency much less stressful.
Sales Tax NexusThe first step in understanding where or not you are required to collect sales tax form customers is to identify where your business has a sales tax nexus. Your business could have a sales tax nexus in multiple jurisdictions. Furthermore, each jurisdiction may have different rates.
While we often think of sales tax as being one percentage (that is how it will be presented to the consumer), sales tax is comprised of rates for multiple governing bodies such as a state, county, city, or municipality. For example, a bustling entertainment district of a city may have a higher tax rate to cover additional costs, such as extra police officers. It's possible for two addresses in the same city, state, postal code to have different tax rates.
Products vs ServicesSome states choose not to tax businesses who provide services. For example, in Californa, plumbers generally do not charge sales tax because they are providing a service. Meanwhile, if you go to your local Home Depot and buy a new faucet, sales tax must be collected.
Destination Based vs Origin BasedIn the world of traditional e-commerce (think Amazon.com), the concept of destination vs. origin-based is crucial. If a business sells online and is based in one state (the origin) but ships product to other states (the destination), it could impact the sales tax nexus for those transactions. I've seen photo booth rental companies interpret this in two ways:
1) The origin of services is the business's primary address, and the destination is the venue your traveling to provide your services.
2) The origin of the services you provide is based on the venue's address because the staff is physically operating at that location. This interpretation means you'll need to collect the state, county, and city rates based on each location where you provide your services. Effectively, your business will have a different sales tax nexus for each booking.
Sales Tax vs Use TaxUse Tax is another concept worth noting. A Sales Tax is collected on behalf of the government by the seller. Conversely, the consumer of goods or services is responsible for paying a Use Tax directly to the government on qualifying transactions. A common example is buying a car out of state where no sales tax was collected on the initial sale. It's the government's way of preventing people from avoiding taxes and simply making big purchases across state lines.
Use Taxes are much harder to enforce, and it's why most businesses are saddled with the responsibility of collecting sales tax from consumers.
Digital and Tangible Transfers of PropertyAnother concept that may impact your responsibility to collect sales tax is whether or not you're are transferring property to the client digital or physically. You may operate in a state that does not require a sales tax on services where there is no transfer of property. On the other hand, as soon as you print photos or allow customers to text photos to themselves, a transfer of property may have occurred.
RemittanceAny sales tax collected by your business must be paid to the government. Each state has different rules concerning the frequency and which jurisdiction (state, the county city, all three) one will cut the check.
For example, in Texas, it might look something like this:
* Remit Monthly: if tax is $1,500 or more for the calendar quarter
* Remit Quarterly: if tax is under $500 for the month or $1,500 for the calendar quarter
* Remit Annually: if tax is under $1,000 for the calendar year with Comptroller authorization
The Sales Tax Institute has a handy chart of each state's return filing thresholds for sales tax. It's worth noting you'll need to acquire a sales tax permit prior to remitting sales tax.
Sales Tax Exempt OrganizationsIf you find yourself collecting sales tax, you may be hired by a client who is exempt from paying sales tax. For example, in Florida, governmental entities (cities, counties, school districts, libraries) are exempt from paying sales tax. If a client requests to have sales tax removed, be sure to collect valid documentation such as a Florida Consumer’s Certificate of Exemption.
Speaking with your accountant or tax advisor to develop a game plan for complying with the laws which apply to your business is highly recommended. You can also reach out to your local taxing authority for guidance.