Applicable taxes: Overview, definition, and example
What are applicable taxes?
Applicable taxes refer to the taxes that are legally required to be paid based on specific transactions, income, property, or activities, as determined by government authorities. These taxes may vary depending on the jurisdiction (local, state, national) and the nature of the transaction or business activity. Applicable taxes can include sales tax, income tax, property tax, excise tax, and others that are relevant to a particular situation or transaction.
In contracts or agreements, the term "applicable taxes" is often used to clarify the responsibilities of the parties involved regarding tax payments. It indicates which taxes must be paid by either the buyer or the seller, the employee or employer, or any other party in the context of the agreement.
Why are applicable taxes important?
Applicable taxes are important because they ensure compliance with tax laws and regulations. For businesses, properly accounting for applicable taxes is essential to avoid penalties, fines, or legal action. It also helps ensure transparency in financial reporting and transactions.
For individuals and businesses, understanding which taxes are applicable ensures that they are not overpaying or underpaying their obligations. It is crucial to factor in applicable taxes when negotiating contracts or making business decisions to avoid unexpected costs or liabilities.
Understanding applicable taxes through an example
Imagine a business that sells goods to customers in a state where sales tax is applicable. The business must collect the applicable sales tax from the customer based on the price of the goods sold and remit it to the state tax authority. The contract between the business and the customer may specify that the buyer is responsible for paying the applicable taxes, ensuring clarity about who is liable for these costs.
In another example, a contractor provides services to a client and is paid for the work completed. If the contractor is subject to income tax, the contract may specify that the contractor will be responsible for paying the applicable taxes on the income earned from the contract, rather than the client covering the contractor's tax liabilities.
Example of applicable taxes clause
Here’s what an applicable taxes clause might look like in a contract:
“The Buyer shall be responsible for the payment of all applicable taxes, including sales, use, value-added, or other taxes imposed by any governmental authority, that are applicable to the purchase of goods and services under this Agreement. The Seller shall provide the Buyer with a breakdown of such taxes, and the Buyer shall pay them promptly upon invoicing.”
Conclusion
Applicable taxes are a key aspect of financial and business transactions, ensuring that all parties comply with the relevant tax laws and regulations. Understanding which taxes apply to a particular agreement or transaction helps businesses and individuals avoid legal issues, penalties, and unexpected costs.
For businesses, properly identifying and addressing applicable taxes in contracts and transactions is crucial for financial planning, compliance, and maintaining good relationships with tax authorities. For individuals, being aware of applicable taxes helps in budgeting and managing tax obligations effectively.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.