What Taxes Are U.S. Companies Liable for When Selling to Other Businesses?

In the United States, companies are subject to various taxes depending on their structure and operations. The primary tax that businesses need to pay when making sales is sales tax. Sales tax is typically levied by state governments and sometimes by local municipalities. Each state has its own rules regarding sales tax rates and which goods and services are taxable. For example, as of 2024, California imposes one of the highest combined state and local sales tax rates in the U.S., at 7.25% plus an additional local rate that can vary significantly across different cities and counties.

Sales tax is generally collected from the customer at the point of sale, and businesses are responsible for remitting these funds to the appropriate tax authorities. It's important for companies to stay informed about any changes in sales tax laws or rates, as these can impact their bottom line. In recent years, the rise of e-commerce has led to more states requiring online retailers to collect and remit sales tax even if they do not have a physical presence in the state. This development was highlighted in a 2018 Supreme Court decision, South Dakota v. Wayfair, Inc., which allowed states to require out-of-state sellers to collect sales tax regardless of whether they had a physical store within the state’s borders.

Apart from sales tax, businesses also face federal income tax obligations. Corporate income tax in the U.S. is currently set at a flat rate of 21%, following the Tax Cuts and Jobs Act of 2017. This means that corporations must calculate their taxable income based on their revenues minus allowable deductions and then apply the 21% rate to determine their federal income tax liability. However, it's worth noting that there are numerous deductions available to businesses, such as those related to employee wages, equipment purchases, and certain operational expenses. These deductions can significantly reduce a company's overall tax burden.

Another critical aspect of taxation for businesses is payroll taxes. Employers are required to withhold income taxes from employees' paychecks and contribute to Social Security and Medicare programs. The Social Security tax rate is 6.2% for employers up to a certain wage limit, while the Medicare tax rate is 1.45%. Together, these payroll taxes ensure that employees receive benefits later in life while funding current government operations.

For small businesses, there may be additional considerations. Many small businesses operate as pass-through entities, meaning that profits and losses are reported on the owner's personal income tax return rather than being taxed separately at the corporate level. Common forms of pass-through entities include sole proprietorships, partnerships, and S corporations. These entities typically benefit from lower individual income tax rates compared to the standard corporate rate. However, they still need to comply with local, state, and federal regulations regarding sales tax and other business-related taxes.

Moreover, businesses may encounter excise taxes on specific goods or services. Excise taxes are imposed on items like gasoline, alcohol, tobacco, and air travel. While these taxes are usually paid directly by consumers, businesses involved in producing or selling these products are responsible for collecting and remitting them to the government.

In conclusion, American companies must navigate a complex landscape of taxes when conducting sales and operating their businesses. From state-level sales tax to federal income tax and payroll taxes, each type of tax serves a unique purpose in funding public services and infrastructure. Staying compliant with these tax obligations is essential for maintaining legal standing and ensuring long-term financial health. As regulatory environments continue to evolve, especially with the increasing digitalization of commerce, businesses must remain vigilant and seek professional advice when necessary to optimize their tax strategies and avoid penalties.