Much of the business confusion facing many newbie business people is related to the frustration related to taxes, vocabulary, and acronyms. Many times the same things are referred to in different ways or different things have nearly the same name. Here are a few of the most commonly misconstrued terms.
What your Social Security Number is to you as a person, a Tax ID is to a business. When it is used in payroll, it is often called Employer Identification Number or EIN. When it is used to pay your income tax, it is called your Taxpayer Identification Number or TIN. In the end Tax ID, EIN, and TIN all refer to the same thing.
The next most common source of business confusion is also related to taxes. Sales tax is collected only on goods sold to the terminal user. A terminal user is a person or business that uses the product and the product is not intended for any further resale. If you sell your product to another business who is not the terminal user, there is no need to collect sales tax.
However, the transaction should be tied to your customer’s TIN. Therefore, if you buy products from a vendor and you plan to resell the product or incorporate it into a solution you plan to sell, you are not required to pay sales tax on the purchase. However, you must provide your TIN to your supplier.
If you sell a product to the terminal user, you are required to have a sales tax license which gives you the authorization to act as an agent for the various tax jurisdictions. Tax jurisdiction agents capture additional money from the customer based on the appropriate sales tax rates.
A sales tax license is different from a business license, which is the next point of frequent business confusion. A business license is a license to operate a business in a specificity regulated the industry. State level agencies want some level of oversight over certain industries, like food service providers, to make sure they operate in sanitary conditions for the good of the general public.
However, business licenses for other industries were established for reasons other than public safety. A business license is also sometimes called an occupational license. It is sometimes confused with registering your entity (LLC, Corporation) with the Secretary of State, which is something entirely different and unrelated.
Next, on the most common source of business confusion for new entrepreneurs is the term profit. Profit is an incomplete term since it needs to be paired with the term gross or net. Gross profit is the revenue from sales less your cost of goods sold (COGS) and is the amount you have left before paying operating expenses. Net profit is what is left after you subtract your operating expenses.
My sister-in-law operates a weekly flea market booth. She often boasts that she bought this piece for $3.00 and sold it for $5.00, making a $2.00 profit. I have to remind her that the $2.00 is gross profit, not net profit. She still has to pay for rent, utilities, and cover her labor for the time she spends running the booth each weekend. Net profit in her case is likely negative. However, she chooses to focus on gross profit and simply calls it profit.
The last common source of business confusion is related to the acronyms SIC and NAICS. SIC stands for Standard Industrial Code and NAICS stands for North American Industry Classification System. They both are a numerical coding scheme used to characterize specific industries so businesses can be characterized and compared to one another. SIC is an older numbering system which is slowly being replaced with the newer NAICS. However, they both do the same thing. The only difference is that the numbering scheme is different.
Are you confused with the vocabulary and acronyms used by government entities?
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