The term small trader is used to describe a company or business that earns less than a government stipulated minimum amount of revenue or sales each taxation year. The primary purpose of this distinction is to set the threshold of sales over which the firm is required to collect and remit sales or consumption taxes. Taxation on goods and services is determined at the city, state, and federal levels. The thresholds that define a small trader are all set at these different levels.
Although exemption from collecting sales taxes may seem like a bonus to small firms, it can actually be a hindrance. Small traders who are not collecting the tax, are typically not allowed to be exempt from the tax or receive credit for taxes paid on other goods and services. This additional expense can create cash flow issues that are not experienced by larger firms.
Small trade status is typically found in three different sectors: professional services, niche market services, and limited volume distribution. It is very rare in manufacturing, auto services, or distribution firms. The fundamental reason is that these three sectors require a significant initial investment in equipment, space, and tools. The revenue stream required to sustain that type of experience and obtain financing for precludes them from small trader status.
Professional services, such as accounting, consulting, or freelance work, typically do not generate sufficient income in the first year of operation to meet the revenue threshold. It is important to note that the evaluation period is defined as one taxation year. Small business start-ups should consult their accountant about the month the taxation year begins, and if they are going to use the calendar or the fiscal year. Many small self-employment or boutique firms keep their revenue below the threshold to avoid responsibility for charging, recording, and remitting sales or consumption taxes.
Niche market services, such as handmade clothes, jewelry, or creative artists, have a very small market that they supply. The level of effort in these areas may not necessarily translate into revenue. As such, they are often considered small traders.
A limited volume distributor of goods such as a flea market vendor, homemade food products, or beauty supplies, is a small trader due to the amount of annual revenue generated. These types of businesses are typically sidelines, as the proprietors have full- or part-time employment elsewhere. Many creative artists start out as a small trader, selling their work at fairs, galleries, and in flea markets. Over time, they often build a loyal customer base, allowing them to transition into a profitable business.