Mechanics tell you that you can keep your car running best by checking the engine occasionally and keeping up with the recommended maintenance schedule. Sales tax is similar in that you need to monitor the process, adjust, and tune-up the process occasionally.
Sales tax rules, rates, filing frequencies and many other details change frequently. Whether you manage the process in-house, work with a technology vendor or outsource completely, you must understand the pieces to remaining compliant: remitting payments; maintaining and updating your tax calendar; reviewing nexus; keeping up with notices; researching taxability rules; validating exemption certificates … the list goes on.
But what about the information in your actual return – do you understand how the data you input is projected onto what you file and remit? You can’t forget that someone needs to connect the dots on your sales tax return before you sign it and send it in – to do anything else invites an eventual visit from the auditor.
Calculate your tax correctly
First you start with the data itself and calculating the proper sales tax. Two core pieces of information are required to calculate the applicable sales tax: tax rates (based on the location of your customer) and the taxability rules associated with your specific product or service in that location.
These rates and rules can be managed fine in some situations without the need for sales tax calculation software. If you decide that calculation software is the better option, know that most sales tax calculation software today is delivered in the cloud via a Software-as-a-Service model.
These tools automate the sales tax calculation process by integrating with the invoicing or ERP system typically via an API (Application Programming Interface). When it comes time to create a customer quote or invoice, the ERP system will pass certain data elements (customer location, product, sales amount and so on) to the sales tax calculation system which will then calculate the sales tax and pass back to the ERP system the applicable sales tax. Ensuring the system you are using to calculate tax is up to date and producing the right data is an important factor to ensuring the accuracy of your returns.
Whether calculating through an external software or your internal accounting systems, the data collected create the basis for your returns. You will only be filing returns in jurisidictions where you have sales tax nexus. A return for your sales tax obligation to a jurisdiction starts with basics that look too obvious to overlook – but aren’t.
Pick the right form. To be sure you have the right form to file, you must understand the difference between sales tax, seller's use tax and vendor’s use tax.
- Sales tax is imposed on the sale, transfer or exchange of a taxable item or service, applies to the sale to the end user (i.e., the consumer) and is added to the sales price.
- Seller’s use tax is offered by certain states to vendors who meet certain requirements – often sellers lacking a physical presence in the state. Seller’s use tax rates may differ from sales tax rates, but they also apply on the sale to the end user and are added to the sales price.
- Consumer’s use tax is imposed on the storage, use or consumption of a taxable item or service on which no sales or seller’s use tax has been paid.
The Sales Tax Institute notes that most states, once a business registers for sales or use tax, initially send preprinted tax returns to taxpayers unless the taxpayer has registered for e-file status. If you don’t know if you are registered correctly, contact the state to confirm what information they have in your file regarding your type of business or inventory locations. Changes within your business operations can also result in changes for tax collection and the type of form you need to submit.
Fill out the form correctly. Sales tax returns start with reporting gross sales. You can then claim deductions to calculate taxable sales. Some states’ forms have multiple lines to report deductions; others don’t. Failure to put the deductions on the correct line likely won’t result in an assessment or penalty, but it could raise questions under audit.
Don’t miss a due date. With sales and use tax compliance, there are six primary deadlines each month – 7th, 10th, 15th, 20th, 25th and 30th – without considering the odd due dates for certain states. Returns are typically due either monthly, quarterly or annually. Some states have more unusual frequencies, including semi-annual, bi-monthly, occasional and sometimes weekly prepayments.
In most cases, the higher the volume of tax to be reported, the more often you are required to file and pay.
Managing your tax calendar is key to the compliance process. Your calendar should reflect where your business is registered for sales tax purposes, the filing frequency of each return, the e-file credentials and other state-specific information. This calendar will need to be maintained and updated as filing frequencies change or you register in additional state or local jurisdictions.
File and pay. Most states now use electronic filing for sales and use tax returns. The most common approach taken by states is web-filing, in which you log onto the state’s department of revenue website and input the required data into a web form. In some cases, you can import your data into the web form.
Payments are generally due on the same date as the return. Many states allow – or in some cases require – electronic payment. And if you are required to pay electronically and instead send a check, penalties could apply.
The world of sales tax is complex – in part because many obligations keep changing or are not obvious. Take the example of zero due returns.
Suppose you’re registered for sales tax in a jurisdiction because you have established sales tax nexus. For various reasons, you don’t have any sales tax to remit. You may think that because you haven’t collected any sales tax, you have no return to file.
Wrong: Most states in which you’re registered want to hear from you even if you don’t have any sales tax to remit. Generally, you file returns reflecting no sales or tax collected – aka “zero-due” returns – by your due date even if you didn’t collect sales tax from your buyers. Some states even levy a penalty for failing to file a zero-due return.
If you file a zero-due return over multiple filing periods, sometimes a jurisdiction will allow you to reduce the filing frequency from monthly to quarterly or even from quarterly to annually.
You can have a zero due return obligation for many reasons. If you’re selling to tax-exempt entities or other businesses that are buying for resale purposes, for instance, there will be zero tax due, but a return will still need to be filed. Another situation is that you may have sporadic taxable sales in a jurisdiction but numerous tax-exempt sales.
In short, who and where your customers are determines largely when and how to file an accurate sales tax return.
No doubt about it, sales tax compliance means connecting a lot of dots.
If you need help understanding your obligations and whether you should be collecting sales tax, get in touch. TaxConnex has experts to help you establish an ongoing process to remain compliant in the changing world of sales and use tax.