You are liable for sales tax as soon as you run a business. This means that you have to levy sales tax on your sales, which you then pay to the tax office.
Conversely, you can get a refund of the sales tax on products or services that you buy from the tax office.
What is sales tax?
According to gradinmath, the sales tax , the individuals also often referred to as value added tax known is a consumer tax . This means that the buyer bears this tax and you, as an entrepreneur, only collect it and pass it on to the tax office.
In most cases the sales tax is 19% . A sales tax of just 7% is levied on a few products, such as groceries or books. Agricultural and forest products are also taxed differently (10.7% or 5.5%).
When am I liable for sales tax?
As an entrepreneur, you are generally subject to sales tax, regardless of whether you are selling a consumer good or a service. You add this tax to the price of your product or service and pay this amount to the tax office. Conversely, as an entrepreneur, the tax office reimburses you for the sales tax that you have been invoiced.
You buy a ballpoint pen from a manufacturer. The ballpoint pen costs € 1 + € 0.19 sales tax. You pay this bill in full.
You then sell the pen to the end consumer for € 2 + € 0.38 sales tax.
This means that you have to forward € 0.38 to the tax office, but also get a refund of € 0.19 from the tax office.
There are only a few exceptions for which no sales tax is charged. These exceptions are regulated in § 4 UstG (Value Added Tax Act). This includes, among other things, medical treatment, support and nursing services, the sale of land, insurance, loan brokerage and, above all, all small businesses .
Exception: small business owners
As already mentioned in the previous chapter, as a small business owner you fall under a special regulation in the sales tax law. When setting up your own business, under certain conditions you can freely decide whether you want to act as a small business owner or not. Since this decision is binding for 5 years, we will present this small business regulation to you in more detail below.
Who is a small business owner?
You are a small business owner if you have achieved sales below € 22,000 in your year of existence or in the previous calendar year and your sales will probably not exceed € 50,000 in the next year either.
Small business regulation
The so-called small business regulation is about exemption from sales tax and this is regulated in § 19 UstG . This means that as a small business owner you are not required to collect sales tax on your products or services. Since no sales tax is collected, no sales tax has to be passed on to the tax office. This leads to a considerable simplification of the bookkeeping.
However, if you do not report sales tax, you are not allowed to claim back any sales tax ( input tax ) from the tax office. Whether this is critical to your business depends on the level of your investment; if you have low investments, the small business regulation is worthwhile, if you have a lot of investments, on the other hand, you should consider voluntarily foregoing the regulation. You should carefully weigh up the decision of whether to take advantage of the small business regulation, because it is binding for 5 years .
It is also important that you clearly communicate your status as a small business owner to the outside world. This means that a reference to the application of this must be recorded on your invoice . This is done through instructions such as “According to § 19 no sales tax is calculated.” .
The small business regulation only applies to sales tax. This regulation has no influence on trade or income tax.
What happens if the limit for the small business regulation is exceeded?
If your turnover rises above € 22,000 in the current year, you will be liable for sales tax the next year. Then it is your responsibility to act accordingly. The tax office does not have to point this out to you explicitly. If you do not notice that this limit is exceeded and you do not pay sales tax, the tax office can demand an additional payment . You would then have to deduct this from your income and would suffer a loss. This means that as a small business owner you always have to keep a close eye on your sales.
Advantages and disadvantages of small business regulation
The small business regulation offers you some advantages . Especially with a new start-up, you have to deal with so many new aspects that relieving the administrative burden can save you a lot of time. Invoicing is less complicated and you don’t have to deal with regular tax returns and payments to the tax office.
In addition, you can make your prices more flexible and a little cheaper because, unlike potential competitors, you do not have to add sales tax. This can give you a competitive advantage with private end customers . The situation is different for commercial customers: Since they can have their sales tax reimbursed by the tax office, there is no financial advantage here.
If you as a small business owner do not collect sales tax, this means that, conversely, the tax office will not reimburse you for any sales tax you have paid. This is an important aspect that makes you need to think carefully about whether you want to be covered by the small business regulation. If you have high investments, especially at the beginning of your self-employment, the decision in favor of the small business regulation can lead to high financial disadvantages , as you forego the so-called input tax deduction . Once you have made your decision, your decision is binding for 5 years.
Another disadvantage can arise when moving from a small business owner to a normal business. Since you are then suddenly liable for sales tax, you also have to increase your prices. This can scare off your existing customers and you lose a possible competitive advantage.
By using the small business regulation, you also show that you only have relatively low sales. For some customers, this may be a sign of worse work.
Overall, the small business regulation can be a good, suitable option for you, especially if you are just starting your business. However, you should then always keep an eye on your finances in order not to miss the point where your sales exceed the limit for this regulation. If you miss this point, it can lead to major financial penalties.