Apart from determining if tax is owed and which items are taxable or exempt, the actual work of calculating sales and use taxes and filing the appropriate returns is both time- and labor-intensive.
Key steps include:
Determining which jurisdictions require returns (i.e., where you have nexus)
- Before you can collect sales tax from your customer, you must apply for a sales tax license from your state or local jurisdiction. This is accomplished by contacting the taxing authority’s Department of Revenue, Finance, or Taxation. Some jurisdictions call this license a Sales and Use Tax Permit. Once your application is approved, you will be assigned a tax ID number and instructions on how to submit your tax return/payment, and your filing/payment frequency.
- The filing frequency of your sales or use tax returns will depend on the state or local jurisdiction. The most common filing frequency is monthly or quarterly. This frequency is typically determined by the amount of taxable sales (and purchases subject to use tax) total sales, or the amount of tax due. Even if your business did not make any taxable sales or purchases during the reporting period, you may still be required to file a sales and use tax return.
Identifying which forms to complete (sales tax only, use tax only, or a combined return)
- Most jurisdictions will send pre-printed tax returns, and your initial sales tax license registration as a taxpayer determines which forms are sent to you so it is important to make sure you are registered correctly. If you have changed any business operations this may change which tax you must collect so it is important to inform the necessary tax jurisdictions about these business operation changes to ensure that you are filing the correct tax returns.
- It is important that you are completing the correct form. For example, if a Pennsylvania vendor sold and shipped merchandise to a customer located in Pennsylvania, the vendor would be required to collect sales tax from the customer and remit taxes using a Sales Tax Return form. However, if the same Pennsylvania vendor sold and shipped merchandise to a customer located in Alabama, the retailer would be required to collect seller’s use tax from the customer and remit payment using a Seller’s Use Tax Return. Some jurisdictions call this form a Vendors Use Tax Returns or a Retailers Use Tax Return form. In jurisdictions like Alabama, a separate form is used to file and remit the sales tax or sellers use tax. In this situation, the tax rate and sourcing can change. Sourcing determines which city, county or other local jurisdiction will be paid the tax revenue.
Completing the correct forms
- Your sales or use tax return is a summary of your business activity during the filing period. The exact process may vary by jurisdiction. The information on your tax return may include:
- Total gross sales;
- Total nontaxable sales;
- Total exempt sales;
- Total taxable sales;
- Any purchases subject to consumer use tax;
- Any uses subject to consumer use tax;
- Credits being claimed on the return;
- Total sales tax, use tax, and any special taxes you collected or were required to collect; and
- Any current company/business information
Filing on time (late or incorrect filing runs the risk of the assessment of penalties and interest and possibly an audit)
- If you don’t file your tax return by the proper due date, don’t pay the full or correct amount due, or both, you will be assessed penalty and interest. Penalty and interest will be calculated on the amount of taxes due. Many jurisdictions have a minimum penalty for late filing, even if no tax is due for the reporting period. Most jurisdictions compound the interest daily, and the rate may be adjusted quarterly. In addition, a jurisdiction may apply civil and criminal penalties if you do not comply with your responsibilities to collect and remit sales tax.
Sales Tax Automation
For some SMBs, an automated returns offering provides a time-saving solution. Automating the process unburdens a business from the complex and time-consuming tasks of tracking and managing sales and use tax.
Those delivered via the cloud minimize a retailer’s hardware investment and automate update processes. In addition, a cloud-based solution allows SMBs to import tax data from any financial system to generate accurate and compliant returns. Services that charge on a consumption basis allow a retailer to pay only for returns it prepares (or those prepared for it by the tax management service).
For more information read 5 Steps to Simplify Sales and Use Tax for Retailers.