Sales taxes are a notorious headache for businesses across most of the country. The system is convoluted and the responsibility for the process of collecting and paying sales taxes lies entirely on the business.
Unless you live in Alaska, Delaware, Montana, New Hampshire, or Oregon, you will need to pay. This applies to any product or service that is taxable, in the eyes of the IRS.
Here’s what you need to know about collecting, reporting, and paying state sales taxes.
Understand the Complexity of Sales Taxes
The main issues surrounding sales taxes are their complexity. Multiple taxing localities are always involved in the collection. To make things worse, each locality has its own set of taxable products/services and different rates. This can create major headaches for businesses in multiple states.
Online sales tax collection is even more complex. There are still many debates and discussions over when they should apply and who should pay them.
Understanding sales taxes through being aware of online and offline sales tax rates is the first step to mastering them.
Register for Sales Taxes
Every business selling a product that’s eligible to pay sales tax must register with the taxing agency in their state. Each state will have a separate online portal and your business will be required to register separately in each state it operates in.
Take note, it’s not necessary to register in every state just because you sell online. This matter was clarified a few years ago. The rule applies more to physical locations, rather than online presence.
The Supreme Court ruling in S. Dakota v. Wayfair increased states and their ability to collect sales taxes from online sellers. If you sell a significant quantity of product in a specific state you may need to register for sales tax filing in that state.
The exemption is typically for businesses who made less than $100,000 or made fewer than 200 transactions within a calendar year.
To learn more about registering for sales taxes visit this website.
Be Aware of Your Locality
The complexity of sales tax is every locality has the ability to charge its own set of taxes. This means that a product sold in Detroit can have a completely different tax rate to a product sold in Grand Rapids.
Get all the information on sales tax rates on your products in each locality where your product is sold. This has to be included alongside your state sales tax obligations.
Your Obligation When Collecting Sales Taxes
All states which charge sales taxes require the business to show the tax amount separately from the price. This is relatively easy in land-based stores because modern cashiers will program the sales tax into purchased automatically.
Online sellers should make sure they have a platform that calculates sales tax separately. It still has to be shown to customers and you’re required to keep these records for later.
Use an Online Accounting System
Sales taxes are complex even if you run a small local store. The best way to look at it is you’re collecting taxes on behalf of the state. The amount received in sales tax isn’t your money and you’ll be required to pass it on.
Invest in a modern online accounting system. They will calculate the sales tax collected and give you a running total of how much you need to report to the state.
Paying Sales Taxes? How Much Did You Make in Sales?
When it’s time to pay, you need to be aware that sales taxes must be paid at least quarterly in every state.
However, different states require businesses with a certain quantity of sales to pay monthly. Be aware of your state’s limits so you know when you have to pay sales taxes to the state authorities.
Be Aware of Local and State Sales Taxes
Tax audits often reveal unpaid taxes because businesses failed to calculate local and state sales taxes together. This is why it’s wrong to look at the baseline state sales tax rate because it can be deceptive.
For example, Louisiana has a low 5% state sales tax rate, but most localities have a high local tax rate, taking the Louisiana sales tax average up to 10%.
Understand Changing Rules on Exemption Certificates
Filing and tracking the right exemption certificates is extremely complex and many well-intentioned entrepreneurs have fallen victim to failing to keep track of everything.
Entrepreneurs need to have active exemption certificates with specific links to all sales where taxes aren’t due. Businesses have to prove that every sale was exempt, and states change the rules all the time.
This is why an audit trail must be set up and followed to ensure certificates are constantly renewed and rules are kept track of. Many businesses will find value in hiring a sales tax accountant to manage this process.
Know-How Sales Tax Holidays Work
At least 17 states have tax holidays for sales taxes. This allows consumers to buy certain goods, such as schools and hurricane supplies, without the need to pay sales taxes.
For example, Tennessee offers a 7% sales tax cut on certain weekends of the year, whereas in Alabama it’s just 4%.
These tax holidays are unpredictable and difficult to keep track of. The lack of consistency means business owners should maintain a calendar of sales tax holidays. Many customers on these weekends are shopping just because of the sales tax holiday, so don’t disappoint them by forgetting.
Sales taxes are complex, and states understand that. Mistakes happen and most states won’t say anything about the occasional mistake here and there. It’s wise to hire an accountant to handle your sales taxes because the penalties for serious mistakes can be severe.
Smaller businesses will find this process less complex because of the number of exemptions states have for smaller sellers.
Follow the basic process and don’t be afraid to invest in a professional to look over your numbers. It’s difficult but you’ll soon get the hang of it.