All About Sales Tax

Sales tax is a form of consumption tax imposed by the government on goods and services sold. It’s usually calculated as a percentage of the selling price. This tax is collected by the seller, (you) then remitted to the government. Understanding the intricacies of sales tax is crucial for effective management, ensuring a seamless process and avoiding future issues.

Sales tax is categorized as an indirect tax, unlike income tax, as it is not directly paid to the government. Retailers collect sales taxes from customers and pass them on to the appropriate government entity, serving as a significant revenue source for states nationwide.

Sales tax rates can differ based on your business's and customers' locations. While tracking these rates and regulations may be complex, there are tools and resources available to simplify the process. It is the seller's responsibility to accurately file and submit sales tax to the state.

Certain states, such as Delaware, New Hampshire, Montana, and Oregon, do not levy sales tax. Alaska lacks a statewide sales tax but permits local governments to impose a local sales tax. Colorado boasts the lowest sales tax rate at 2.9%, while California has the highest at 7.25%.

Remember, many states have both state and local sales taxes. For example, a state might enforce a 4% sales tax, with a county charging 2%, and a city adding 1.5%, totaling 7.5% for residents. Additionally, certain purchases, like clothing under $200, are often exempt from sales tax.

Alongside collecting sales tax from customers, maintaining detailed records of sales transactions and corresponding taxes collected is crucial for filing accurate sales tax returns with the state tax authority.

A reliable bookkeeping company should stay abreast of any legislative changes that could impact your business, as part of the services you pay for.

Nexus

Having "sales tax nexus" essentially means that you have a substantial physical presence in a state or locality, which obligates you to adhere to the sales tax regulations there. If your business has nexus in a state with sales tax requirements, you must file accordingly. If you lack nexus in a state, no sales tax filing is necessary.

How do you determine if you have nexus?

• If your business has a physical presence in a state, it qualifies as nexus. For instance, a gym or fitness studio with locations in Oklahoma City, Dallas, and Memphis would establish sales tax nexus in Oklahoma, Texas, and Tennessee.

• Having employees in a state constitutes nexus. For example, if your fitness studio is in Dallas but employs a virtual instructor in Miami, you would have sales tax nexus in both Texas and Florida.

• While this may not apply as frequently to fitness studio and gym owners, maintaining a warehouse or inventory in a state establishes nexus. For example, if your fitness studio is in Dallas but you store your self-made protein drink inventory in San Diego for fulfillment purposes, you would have sales tax nexus in both Texas and California.

Once you have confirmed your nexus status, you need to register for a sales tax license or permit in the states where you have nexus. This step enables you to start collecting sales tax from your customers. Upon receiving your license or permit, ensure timely filing of your sales tax returns by the designated due dates (usually monthly, quarterly, or annually). Even if there are no sales during a specific period, filing a zero return is required.

Given the complexity of sales tax, particularly at the local level, we encourage you to research to ensure accurate collection from your customers. If you struggle to find rates for your specific location, seek assistance from a professional or utilize software that can assist in this determination.

Another thing subject to sales taxes are memberships. This includes one-time membership fees, periodic dues, initiation fees, and social memberships that grant access to your gym but not to any additional facilities.

More examples of taxable items:

• Saunas

• Spas

• Steam baths

• Swimming pools

• Tanning services (excluding spray tanning)

• Snack bars serving juices or health drinks

• Birthday party packages that include food, favors, access to swimming pools or other sports facilities, or equipment.

• Skincare products, handball gloves, tennis balls, and gym bags.

• Sales of food supplements, vitamins, and stimulants.

• Massage services (unless a customer presents a referral from a licensed health care facility or professional for the treatment of injury, illness, or disease.)

• Prepared food, soft drinks, candy, and dietary supplements sold through vending machine.

• Towel services. (However, towels or items provided to customers as part of a linen supply service can be purchased tax-exempt for resale by submitting a completed Form ST3, Certificate of Exemption, specifying the resale exemption. If you launder your towels, you can purchase water, soap, bleach, and other materials tax-exempt for laundering purposes, specifying the other exemption and indicating materials to provide taxable services.)

• Sales or leases of equipment or other items used in your business.

While donated massage therapy or any other donated services or admissions are not subject to taxation, the donor must pay sales or use tax on any taxable items used in providing these services or admissions.

Pro Tip: When customers use store coupons or discounts to buy taxable items, deduct the coupon or discount amount first and then apply sales tax to the reduced amount. For manufacturer coupons where the seller is reimbursed for the coupon's value, charge tax on the coupon amount and the customer's payment.

Examples of non-taxable items:

• Fees for aerobic, exercise, yoga, or other classes

• Consultation fees for weight control or nutrition

• Services such as cosmetology, body wraps, and waxing

• Daycare services

• Fees for a personal trainer

When you buy things to use in your gym, tax applies as follows:

• Administrative supplies

• Equipment

• Audio and video tapes

• Building cleaning and maintenance services

• Eye and ear protectors

• Furniture and fixtures

• Lawn care services

• Linen supply and laundry services

• Pool chemicals

• Security services

Any of the above items bought for resale to customers are not taxable. Submit a completed Form ST3, Certificate of Exemption, to your vendor. Specify the Resale exemption. Clearly state the sales price and charge customers sales tax when selling taxable items at retail.

Supplies provided at no additional cost to customers, like lotions, tanning supplies, towels, and deodorants, are taxable when bought by the establishment.

Facility repairs or remodeling, are not taxable. The contractor is responsible for paying sales tax on all supplies and building materials used. If you undertake the improvements yourself, you must pay sales or use tax on the supplies and materials cost.

When you have a reliable bookkeeping company, it’s their job to stay on top of these things. After all, that’s what you pay them for! Visit us at Gymbookkeeping.co to see how you can put HarQuin’s bookkeepers to work for you.