Running a business comes with the good and the bad, such as freedom, flexibility to work whenever and wherever, and then of course…compliance which ranges from business permits, licenses, certificates, annual secretary of state filings, resident agent service fees and if you sell tangible goods, this will mean sales use tax which is the subject of today’s blog. Not staying in compliance can lead to hefty penalties such as fines and suspension of your corporation or revocation of your seller’s permit or resellers certificate.
Depending on your state, fines for not collecting, reporting, and remitting sales use tax can be hefty, often exceeding the sales tax due to the taxing authority. Sales use tax can be a complicated matter with many factors to consider such as:
- Local district sales tax – Often, the state will have a set sales tax rate but depending on the county or city which you operate out of, there may be an additional tax rate for the county and district.
- Nexus – A book can be written about this, so to summarize, this is the level of connection between a taxing jurisdiction such as a state and an entity such as your business. This can be a financial or economic connection. For example, if your business in is California but you also have a warehouse in Nevada, then you now have a nexus in Nevada and you must collect, report, and pay sales use tax in that state.
Certain requirements must be met, but each state has established thresholds in establishing a nexus such as several annual transactions or annual sales. This is typically 200 transactions or anywhere from $100,000-$500,000 in annual sales. Avalara, a sales use tax specialist has done a great job of outlining those thresholds by state here.
- Tax matrix seller guidelines – Once you determine if there is a nexus, this guideline lists the taxable items and their exemptions. For instance, in California, a coin and collector reseller is required to tax the purchaser for certain collector items, except for certain commemorative items such as “California Gold” medallions. An example of what this looks like is found here.
Each state will have their own guidelines, so it is up to you the business owner to familiarize yourself with your industry and what is subject to sales use tax.
This process can be time-consuming, definitely not a value-add activity, but a necessary one to stay in compliance.
Overview Of Requirements
Collecting
Once you determine what can be taxed in your course of business, you will need to collect sales use tax. If you are a local retailer then your tax rate will remain fixed. If you deliver purchased goods to another county in your state with a different tax rate, you will need to charge the tax rate at that location since you have a nexus throughout the state.
If you are an online retailer selling outside your state, you may not be required to collect sales use tax, but check with your state’s department of sales use tax (usually state revenue department). Some eCommerce platforms will allow you to set up various tax rates to make the purchase process a breeze at checkout for your customers so check with your service provider. If your cart does not allow for various tax tables then you may need to consider an API interface that will allow you to set up the calculation. If you do not collect the right amount, you’ll be responsible for the difference.
To further complicate matters, shipping is taxable in some states as well, so you will need to also configure that into your cart if applicable.
Reporting
Depending on your state and industry, you may need to report collected sales tax monthly, quarterly, or annually. Review the state’s site for deadlines and set calendar reminders for yourself. You’ll need to create an online account which often requires a pin to be mailed to you so take that into account and don’t wait until the last minute to file your report.
The tax collected should be recorded as a liability on your books and any sales use tax already paid should offset this amount. There are additional exceptions you may be able to exclude so make sure you review your state’s reporting requirements in full to ensure you do not overpay. For example, the sale of goods to the government may not be taxable.
Most basic accounting systems are set up for you to record the sales tax paid or collected separately which will make reporting easier. You will still need to manually calculate any exceptions based on your state.
Payment
The reporting portion may be separate from when the payment is due so ensure any sales tax collected is reserved for, so you have the funds available to remit come to the deadline.
Ensure you have all the proper backup in case of an audit. This can be online sale receipts to prove out-of-state sales or shipping receipts.
