Business tax obligations can be exhaustive, spanning the breadth of federal, state and local jurisdictions. While income taxes and annual information returns tend to take center stage, it is equally important to prioritize sales tax compliance and keep up with updates that coincide with the new calendar year.
Unlike federal taxes, sales and use tax is collected and remitted to provide direct funding for state, local and regional services. Jurisdictions each have their own tax requirements, and factors like tax rates, sales tax holidays, nexus thresholds and sales volume can each affect your sales tax obligations. Know what to factor into your filing process to report and pay the right amount at the right time.
How is sales tax determined?
Sales tax is a dollar amount charged to customers and clients based on the products and services they purchase. The value is normally a percentage of the purchase price and often the sum of separate tax rates charged by the state, county and city agencies. Sales tax charges can also be assessed by regional transit authorities, tribal governments and others who are permitted to collect funds based on sales in their jurisdictions.
Each state or entity defines what products and services are taxable, what tax rate must be applied and any exceptions to the categories. For example, one state may assess a tax on all food product sales, while no food product sales are taxed in another state, and only prepared foods are taxable in a third. Knowing the nuances of the rules can be an onerous task, so many companies rely on sales tax software to maintain the rates charged at their registers or within their billing systems.
Sales tax compliance is mandatory
In exchange for the privilege of doing business, state and local governments require that companies meet the obligation of collecting and remitting taxes on their behalf when they have sold taxable items or services. Annual business licenses register businesses with state and local governments, and with that comes the burden to collect and remit sales tax.
Record, reconcile and report sales tax amounts
Filing sales tax returns and submitting their payments are separate tasks that businesses must complete. While their due dates may be the same, recording them as separate line items on internal checklists will help ensure that neither step is omitted during the months that they are required.
In order to report sales tax activity, businesses must record the volume of sales by tax category and multiply that amount by the tax rate set by the jurisdiction for that category. Each category total is then added together and reported as the total amount the business is obligated to remit to the taxing authority.
Prior to the reporting and remittance of the funds, the total amount should be reconciled to the funds collected from customers to ensure that the monies received match the obligation that is reported. Any material discrepancies should be investigated and resolved.
Be aware of filing and remitting requirements and due dates
State requirements for filing sales tax returns vary, but many states include several similar elements. Know the dates and cadence with which you must file and remit sales tax based on the rules of your state and local government. Items you should know include:
- Due dates – Often, a return must be filed on a specific day of the month following the month for which the return was filed. For example, for sales tax collected in February, you may be required to file a return on the 30th day of the following month, i.e., March 30. Whether it is the 15th, 20th, or 30th, the date may vary, but it will be consistent throughout the year.
- Weekends and holidays – Be aware of how states that you report to adjust their due dates when they fall on a weekend or holiday. Most will move the due date to the following business day, so take a moment to confirm their practices each year.
- Graduated filing frequency – Some states dictate that all sales tax returns must be filed monthly, quarterly or annually. Many states use a step-up process where, as the amount collected increases, the filing frequency will also increase.
- Electronic filing requirement – Most states mandate electronic filing of sales tax returns once businesses reach a specific sales volume. This can be as little as $500, thus you may meet it quickly. Electronic filing eases workflow, increases accuracy and allows faster processing. Once the minimum threshold is met, update your checklists with the new due dates to maintain sales tax compliance going forward.
- Zero dollar sales tax returns – In a young business, or one dominated by vast fluctuations in revenue, ensure that you understand whether returns are required if there is no taxable revenue in a given month.
Commonly encountered sales tax complications
With over 11,000 sales tax jurisdictions in the United States, there are bound to be a number of complications regarding sales tax compliance that arise for businesses charged with collecting, reporting and remitting sales tax on their behalf.
- Sales tax rates – Smaller and newer businesses may find it time consuming and complicated to manage tax rates and ensure that they are assessed when they should be, calculated correctly and remitted to the appropriate authorities. Additional expertise or support may be needed to maintain sales tax compliance.
- Multiple locations – When businesses operate from more than one location, the obligation also multiples. Rather than simply adding the sales figures and their associated tax to the same tax return, some states require that each site receives a separate code and independently reports their activity.
- Sales tax nexus – Headquarters, retail operations, warehouse facilities and employee residences can create an obligation to collect, report and pay sales taxes even in states where businesses have no physical presence. Sales tax nexus can dramatically increase the scope of sales tax responsibilities, even for the smallest businesses.
- Sales tax holidays – Many states offer a few days a year where customers can buy certain products without paying sales tax. These sales tax holidays encourage sales, but they can make the management and calculation of tax more complex for businesses due to the variation from the normal process.
- Cannabis and other unique industries – Sales tax and other rules around the cannabis industry can also represent a challenge to business owners that grow and sell cannabis products. Excise, retail and sales taxes by various agencies, as well as varying rates on products may take company owners additional time to navigate and manage.
Streamline sales tax compliance
The burden of navigating sales tax obligations while growing your business or expanding to new tax jurisdictions can be an additional strain to your daily business operations. Software solutions may help businesses on a go-forward basis, but implementing them and resolving existing issues can be difficult despite their high priority status.
Request a consultation to learn how Paro can help you streamline your sales tax process or resolve sales tax compliance challenges for your business with the help of our fractional tax experts.