Am I Charging the Correct Sales Tax in My Business?

What I’ve Seen in Practice

In my experience working with small businesses, I’ve seen that sales tax can raise a lot of questions, especially when the same business sells different types of products or services. It’s not always easy to know which tax rate applies in each situation, and the rules can vary depending on what you sell and where the sale takes place.

That’s why it’s worth understanding how sales tax works and making sure your system is set up according to North Carolina’s rules. The goal isn’t to make the process more complicated—it’s to help your business charge the correct amount and keep accurate records.

Why This Matters

Sales tax seems simple until a letter from the state arrives.

The most important thing to understand is that sales tax is not supposed to come out of your pocket. You collect it from your customer and hold it until you remit it to the North Carolina Department of Revenue (NCDOR).

If you collect too little, you may have to pay the difference out of your own pocket when the state comes looking for it. If you collect too much, you could end up with an unhappy customer or problems during an audit.

Handling sales tax correctly helps protect your business margins and gives you peace of mind.

The Simple Explanation

In North Carolina, sales tax has two components. The state sales tax rate is 4.75% and applies throughout the state. A county rate is then added, beginning at 2%. As a result, the combined rate is rarely lower than 6.75%.

In the Triangle area, depending on the county, the combined rate is generally between 6.75% and 7.5%. Because rates vary by county and can change over time, I always recommend confirming the current rate directly with the NCDOR.

Here’s where things can get confusing: not every product is taxed the same way.

Grocery food intended to be prepared or consumed at home—such as rice, beans, or raw meat—is generally taxed at a reduced 2% rate. Prepared food—food that you cook, heat, or serve ready to eat—is generally subject to the full combined sales tax rate.

It’s the same business, but it may need to charge two different tax rates.

A Practical Example

Let’s consider a Latino market that sells both groceries and hot prepared food.

When a customer buys a bag of rice, it is considered a grocery food item and is taxed at 2%. But if that same customer buys a plate of hot food from the counter, it is considered prepared food and is taxed at the full applicable rate.

If the business charges the full sales tax rate on everything, customers may end up paying too much tax on certain items, and the business’s records may not match what the state expects.

That’s why correctly classifying each type of sale is so important.

The Most Common Mistakes I See

Charging the Same Tax Rate on Everything

This is one of the most common mistakes. If your business sells both grocery food and prepared food, you need to properly separate those categories. One may be taxed at 2%, while the other may be subject to the applicable full combined sales tax rate.

Charging Based on the Business Location Instead of Where the Customer Receives the Product

In North Carolina, sales tax is generally determined based on the destination of the sale.

If you make a delivery or provide catering services in another county, you should review the tax rate that applies where the customer receives the product rather than automatically using the rate for your business location.

Collecting Sales Tax Before Registering

Before collecting sales tax, you should register with the NCDOR and obtain the appropriate registration.

Starting to collect sales tax without being properly registered can create problems from day one.

Forgetting the Additional Prepared Food Tax

Some counties, including Wake County, impose an additional 1% tax on certain prepared food and beverages, separate from the regular sales tax.

If your restaurant operates in one of these counties, this additional tax may need to be collected, reported, and paid as required. That’s why it’s important to confirm the specific rules that apply in your county.

My Recommendation

I always recommend that my clients manage sales tax through their system—not from memory.

Set up your products by category in your point-of-sale or accounting system so that each transaction automatically applies the correct tax rate. Confirm the current rate for your county and determine whether any additional prepared food tax applies to your business.

And remember one fundamental principle: the sales tax you collect is not business income. It is money you collect on behalf of the state and temporarily hold until it is time to remit it.

Have Questions About Your Business?

At Lifaver Trujillo, CPA, PLLC, we help small businesses in North Carolina with:

• Accounting and financial reporting

• Payroll and related compliance

• Tax preparation and planning

• State and federal tax compliance

• Financial and business advisory services

  
  

If you need guidance for your business, we would be happy to help.

Lifaver Trujillo, CPA, PLLC

📞 (919) 590-3610

📍 4804 Page Creek Lane, Suite 114, Durham, NC 27703

www.ltrujillocpa.com

Trujillo’s Tip of the Week

Sales tax is not your business’s money—it is money you collect on behalf of the state.

A good practice is to open a separate bank account and transfer the sales tax you’ve collected into that account each week. That way, when the payment deadline arrives, the funds are already available and you won’t have to affect your business’s operating cash flow.

This content is for educational purposes only and does not constitute tax, legal, or financial advice. Every business is different. Consult with your accountant before making decisions.