What’s a Pass-Through Tax?

by TaxJar May 7, 2014

Pass-Through Tax

As a business owner, you watch money flow in and fly back out.  In fact, some money you receive as a business owner hardly stays in your bank account at all.

For instance, when you collect sales tax from a customer you must account for those funds (but they never really factor into your bottom line at all). You collect the tax from the customer and then, after a certain period (a month, maybe, or three months), you’re required to file a sales tax return and remit it right to your state’s taxing authority. You barely have time to wave at it.

Sales tax is what’s known as a pass-through tax, because it “passes through” from the customer to whatever government agency wants it. You’re basically a conduit for this tax to reach its final destination; a way station, in a sense. That means you should never really “pay” sales tax. When sales tax collection is done correctly, you’re not reaching into your own pocket to pay the state. In collecting sales tax you’re acting as the state’s tax collector, and you get in trouble if everything isn’t on the up and up.

While there are many examples of pass through taxes, sales tax is undoubtedly the most common and the most divisive. The online sales tax debates have simply amplified the unfairness that was already present. Now instead of having to worry about being their own state’s tax collector, they must play that role for other states in the US.

Don’t think it’s fair? TaxJar doesn’t either. Until it gets sorted out, though, why not sign up for an account with us so we can help ease your burden just a little? This way the “passing through” won’t be as painful and you can concentrate on running your business instead of messy online sales taxes.

The basics of US sales tax

Learn the fundamentals of sales tax.

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