Both the process of reporting sales tax and the level of sales tax detail required varies from state to state. Understanding the nuances of each state will help you avoid any missteps resulting in jurisdictional-imposed penalties.
Some reporting requirements that should be considered in your sales tax compliance process are:
1. Know your Deadlines
Returns are typically due either monthly, quarterly, or annually. But some states have more unusual filing frequencies, including semi-annual or occasional. In most cases, the greater the amount of tax you are collecting and remitting, the more frequent you will need to file. Some states even require weekly pre-payments for their largest tax payers. Due dates also vary. The most common due date is the 20th of the month; it can also be the 15th, 25th, 30th or the last day of the month. Understanding what your frequencies are and ensuring you pay on time and in the right way is very important to ensure you don’t get unwanted penalties.
2. be aware of local level reporting
In most states, sales tax is reported to the individual state. Some states have a flat sales tax rate across the entire state and the filing process can be quite simple. Other states have various levels of sales tax that must be collected and remitted including state, county, city, and special district taxes. These states’ returns can be quite lengthy as you may be required to itemize by county or city or district how the sales tax should be applied across these various jurisdictions.
In a few states, most notably Alabama, Colorado, and Louisiana, there are separate local level returns that you are required to file. These local jurisdictions are often referred to as “home rule” jurisdictions as they have their own rules, rates, and filing procedures. Colorado alone has 73 home-rule jurisdictions each requiring their own sales tax return to be filed.
3. Don’t get tripped up by specialty tax rates (non-sales tax rates)
When reporting sales tax, most taxpayers will build their compliance process to file and remit the tax that was collected from the customer. This generally means implementing a “bottom-up” or a “back-calc” sales tax return preparation methodology – starting with the sales tax collected and dividing by the applicable tax rate to determine taxable sales to report. Exempt sales are then either added to taxable sales or calculated as the difference between gross sales and taxable sales.
In some states where reduced tax rates or non-sales tax rates apply to certain products or services, these sales may need to be reported on separate line items or a different filing methodology may need to be used For example, companies that are selling telecommunications services will collect and report various non-sales taxes that could be reported on a sales tax return or even require a separate return. Additionally, leasing companies, companies renting products, and companies selling certain food and beverage related products could have special tax rates that must be reported on different line items of the return.
4. Understand what information is in your data and what you need to report on the return
Details that are ideal in terms of your source data include the following:
- Geographic identifier – typically a state, county, city, zip code combination or a more granular geocode or rooftop address
- Gross sales amount
- Non-taxable or exempt sales amount including a reason (for example exempt for resale, exempt for manufacturing purposes, excluded from tax, etc.)
- Taxable sales amount
- Sales tax collected
- Specialty or reduced tax amounts
- Transaction specific details for reconciliation or audit purposes including invoice number, invoice date, customer number, customer name, etc.
However, many businesses don’t have this level of detail. They may only have a zip code and total tax collected. In some situations, you may not even have a zip code – perhaps you have an IP address. To further complicate matters, you may have multiple systems with various pieces of sales tax data. You might have a traditional invoicing system and a separate e-commerce system each with different pieces of sales tax data. Understanding your various order to cash processes and what level of details each system has available will help you construct an efficient process for reporting the sales tax accurately.
This can be a lot to add to an already busy finance team or tax accountant. Sales tax is constantly changing and as your business changes and grows, so could your obligation. You must ensure you understand the reporting process in each of the states where you have nexus and realize it could be different in many of them and ensure you have the right resources on hand to provide accurate data by set deadlines.
Many of businesses look to outsource their compliance process in order to ensure accuracy and not overwhelm an already overburdened team (or in many cases, one team member). TaxConnex works with businesses of all sizes to remove the burden of sales tax and ensure they remain compliant. Get in touch with TaxConnex to learn more.