In the rapidly evolving health and wellness industry, navigating the complexities of sales tax can be as challenging as developing your next breakthrough product.
As your business scales, so do your tax obligations – and the risks of non-compliance.
This comprehensive guide will unravel the intricacies of sales tax for health and wellness businesses, helping you understand your obligations, avoid costly mistakes, and position your company for sustainable growth. From determining nexus to managing product taxability, we’ll explore why expert guidance is crucial in this uniquely complex field.
As you grow your business, the need to reduce tax burden and meet tax compliance regulations will become increasingly important. In this guide, we’re taking a closer look at these topics to help you strategize for a successful future.
What Is Sales Tax?
Sales tax is a consumption tax imposed on the sale of goods and services. For health and wellness businesses, understanding sales tax is critical due to the industry’s unique challenges, including varied product taxability and multi-state operations.
Sales tax rates remain the same across most industries. It is typically expressed as a percentage of the retail cost at the point of purchase. The percentage rate ranges between 2.9% and 7.25% at a state level, depending on the nature of the product or service.
While the concept seems simple – a percentage added to the retail cost at the point of purchase – the reality is far more complex, especially as your business grows.
Nexus: The Key To Determining Sales Tax Obligations
The first crucial concept in sales tax compliance is “nexus.” Nexus represents the connection between your business and a state that requires you to collect and remit sales tax. Simply put, if you have “nexus” in a state, that means you need to get a sales tax permit, and begin collecting and paying sales tax.
There are two primary types of sales tax nexus:
- Physical nexus: Established when your business has a physical presence in a state, such as a store, warehouse, office, or employees. Remember that storing inventory in marketplace warehouses, like Amazon FBA, can create physical presence nexus!
- Economic nexus: Economic nexus is established if a business exceeds a certain level of economic activity in a state. This is typically measured by sales revenue or the amount of transactions. You can read more about economic nexus and each state’s economic nexus threshold in the blog “What’s Each State’s Economic Nexus Thresholds for Sales Tax?”.
Understanding nexus is vital because it determines where you need to register for a sales tax permit and begin collecting tax. As your health and wellness business expands, you may find yourself establishing nexus in multiple states, each with its own rules and thresholds.
Destination VS Origin-Based Sales Tax
Once you’ve determined where you have nexus, you need to understand whether each state follows destination-based or origin-based sales tax rules.
- Destination-based: The sales tax rate is determined by the buyer’s location or where goods are delivered. Most states follow this model.
- Origin-based: The sales tax rate is based on the seller’s location. This applies only to intrastate (within the same state) sales in a few states.
For health and wellness businesses operating across state lines, this distinction is crucial for accurate tax collection and compliance.
Product Taxability In The Health And Wellness Industry
Health and wellness products can often vary in terms of taxability among the different states. For example, health and wellness companies often sell vitamins, supplements, non-prescription medication, personal care items, and services. While these items are mostly tangible personal property, some states consider these items to be exempt from sales tax.
One of the most common items that are exempt from sales tax are supplements. For example, Oklahoma generally considers vitamins and supplements taxable which requires sales tax collection. However, Pennsylvania generally considers vitamins and supplements exempt which does not require collection of sales tax. You can read about the taxability of supplements in more detail in the “Which States Charge Sales Tax on Vitamins and Dietary Supplements?” blog.
You should also consider that if you are selling your products on a marketplace, like Amazon, that the marketplace will be the one responsible for calculating and collecting sales tax. You’ll still need to set-up the product’s taxability in their tax setting panel, though. You’ll also still need to report these sales on your sales tax returns.
Sales Tax Compliance For Health And Wellness Businesses
It should go without saying that collecting sales tax is important because if you don’t, you could fall into an expensive sales tax audit. If you are missing a sales tax permit, you could be liable for all of the uncollected tax and paying for it out of pocket … plus penalties and interest! Not good.
Registering for a sales tax permit is important not only for legal compliance, but also for business credibility. Most states require businesses to register for a sales tax permit and to collect sales tax on taxable goods and services. This ensures that you are complying with state laws and regulations. This could lead to customers feeling more confident purchasing from a business that is properly registered and compliant with tax laws.
The good news is that by registering your business for a sales tax permit, you can easily get a “resale certificate” which allows you to purchase inventory for resale tax free. You can learn more about how to get a resale certificate in each state in this helpful blog post.
Accurate record-keeping is the first step to ensuring compliance with sales tax laws. Proper documentation and reports helps demonstrate that your business is correctly collecting and remitting the appropriate amount of sales tax. Using accurate and consistent reports will aid you in filing the returns. Filing the sales tax returns timely helps avoid late fees, penalties, and interest charges.
Timely filing also ensures that your business is in good standing with tax authorities which is essential for keeping your sales tax permit active. If your business consistently files or pays sales tax late (or not at all!), this will likely subject you to an audit. You can read more about penalties and interest for each state in the blog “What Are the Penalties for Not Paying Sales Tax?”.
Preparing For Sales Tax Audits
A sales tax audit can be triggered by a range of factors that could raise red flags to state tax authorities. Some of the most common reasons are as follows:
- Audit history – If the business was audited before and resulted in an assessment, it is likely that you will be audited again.
- History of non-compliance – A history of not filing/paying or filing late returns. Inconsistent reporting could lead to an audit being opened.
- Random selection – Audits issued at random to ensure compliance state-wide.
- Customer complaints – Complaints from customers regarding incorrect sales tax charges
- Significant changes in sales – Large, unexplained changes in reported sales or sales tax payments between filing frequencies.
- New business – An audit could be conducted to ensure compliance with a new company.
- Audited vendor or customer – If another business was audited and the documentation leads back to your company
- High-risk industry – Often cash businesses that are known for non-compliance or underreporting sales and sales tax.
While these are some of the most common audit triggers, these are not the only triggers. The best way to be prepared for a sales tax audit is to ensure your tax collections are set up correctly and that you maintain detailed, accurate records. Tax settings can be an overwhelming and daunting task to manage independently. It is highly recommended to consult with a tax professional.
Audits have areas of focus that are standard for all businesses, but there will be a couple of areas of focus that are unique to the health and wellness industry. All audits will include a review of financial statements. This includes a review of sales and purchases made by the business. The auditor will typically verify the total sales to an income statement in order to ensure consistency and accurate reporting. Purchases are typically reviewed to ensure the business is paying sales tax on any items that are not considered inventory to resell.
The health and wellness industry often includes a combination of taxable and exempt products. Auditors will review the taxability of products such as supplements, over-the-counter medications, and personal care items to ensure tax was collected correctly. It is important that you classify your products correctly and can provide regulations to support these classifications in the event of an audit.
A smooth audit starts with accessible and accurate records. Ensure that records are kept long enough for the duration of an audit period which is often three years. Important documentation to retain includes sales records, exemption certificates, purchase invoices, and other relevant information such as income statements and bank statements.
The Pros And Cons Of Sales Tax Software
While automated sales tax software offers many advantages, it’s not a complete solution for health and wellness businesses:
Pros of sales tax software:
- Reduces risk of human error in calculations
- Updates automatically with changes in tax laws and rates
- Provides comprehensive reports for filing and audits
Cons of sales tax software:
- Requires expertise to set up and manage correctly
- May not account for all nuances in product taxability specific to health and wellness
- Can’t replace human judgment in complex scenarios
This is where a done-for-you service like TaxValet becomes invaluable. We combine the efficiency of software with expert human oversight, ensuring your unique product mix is accurately classified and taxed across all jurisdictions.
The Relationship Between Scalability, Growth, And Taxes
Scalability is defined as the capacity to change size or scale. In the context of a business, it refers to how well-equipped your operation is to accommodate growth over time. You may be able to handle the demand for your products at present, but scalability asks if you can handle it in the coming years, when it may have increased tenfold or more.
This is important to remember from a tax perspective because the more productive and lucrative your business is, the more taxes you are likely to have to pay. Educating yourself on how to scale your business and ensure sales tax compliance is necessary for growth.
Business growth can increase sales tax compliance requirements. An increase in sales volume in new states or expansion of physical locations may create nexus in additional jurisdictions. An increase in sales volume is great!
However, it can create economic nexus if the business exceeds the dollar threshold or transaction threshold. Each state has different registration requirements depending on the date you cross nexus. You will need to register for a permit based on the registration requirements and begin collecting and remitting tax in that jurisdiction.
Planning for sales tax may be the last thing on your mind as you are scaling the business. However, it is one of the most crucial. If sales tax is not managed properly and timely, it can lead to significant financial and legal risks. Proper planning ensures that your business is compliant in the necessary states with all relevant tax laws. Timely management ensures the least amount of out of pocket expenses such as historical liabilities that often include penalties and interest.
Accurate sales tax planning allows the business to budget and plan for tax liabilities that can prevent unexpected financial burdens. Additionally, this helps manage cash flow more effectively by being able to anticipate tax payments and that funds are available as needed.
How Do I Scale My Health And Wellness Business?
According to Statista, the global health and wellness market size was estimated at over $4.3 trillion in 2020 and is set to increase to almost $7 trillion by 2025. With such enormous growth expected in such a short period of time, businesses operating within this sector need to be prepared for the growth that comes along with it.
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Invest in technology
If you want to prepare your business for growth, investing in the right technology is crucial. There is an abundance of software programs and tools you can use to automate tedious tasks and optimize your business to help it expand and evolve over time.
Marketing tools, data analysis tools, sales tools, and many others are all readily available and capable of setting you up for easier management operations, both publicly and behind the scenes.
2. Hire your team strategically
Your business’s growth depends on a strong team that understands the mission in mind and can be relied on to implement it effectively. Create a robust hiring, onboarding, and training program so that everyone who joins your team can contribute to your brand’s growth and well-being.
The better your onboarding and training, the greater your staff retention rates and the less money you’ll spend on hiring.
3. Regularly evaluate and plan
Not all scalability plans will succeed, so it is important to be adaptable. The wellness industry is saturated with competition, and learning from your experiences will help you develop strategies that align with your vision and meet tax regulations along the way.
Equipped with a reliable team and the right technological instruments, you can assess your current and future options with the highest level of accuracy possible.
4. Measure your growth continually
Using data analytics programs to measure success (and failure) over time is crucial for scaling your business.
Key Performance Indicators (KPIs) can help you understand your benchmarks and pursue paths of productivity and growth that are realistic and in alignment with your goals.
Are There Any Tax Deductions For Health And Wellness Businesses?
In addition to sales tax considerations, it is important to be aware of any tax deductions you may qualify for in order to reduce your expenditures and become more financially secure.
Luckily for those in the health and wellness sector, there are a number of tax deductions available. Some of the most common ones include:
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Employee expenses
Some of the expenditures your business covers in relation to employee well-being or management can be written off as tax deductions. Benefit plans, employee salaries, and even uniforms, if you use them, can reduce your sales tax liabilities.
2. Essential equipment and furniture
Any purchases you’ve made on behalf of your business relating to furniture and equipment may be eligible for tax deductions. When tax season rolls around, their costs can be written off as long as they are deemed essential to the functioning of your business.
3. Clinic supplies
If your health and wellness business offers any type of treatment service, such as therapeutic or body massage you may be able to get tax deductions for the supplies you use, such as creams, massage oils and lotions. Even coffee, tea, and other refreshments can fall into this category.
If you sell supplements or include them in your treatment offerings, the question of is there tax on vitamins depends on which state you operate in. Most states impose taxes on vitamin sales, but there are exceptions that may benefit your business.
Conclusion
The health and wellness industry is booming, and the need for scalability is more important than ever. If you work in the wellness world, knowing how to equip your business for sustainable growth and tax compliance is crucial.
Fortunately, there are plenty of strategies you can implement for effective, long-term business growth where you can leverage sales tax deductions, too. With these tips, you can set your business up for success in the wellness industry.
