Would you manage your sales tax process the same way you manage your income tax process?
Of course not.
Why? Because they are two different types of tax with differing risks, complexities, and timing. As you develop an effective sales tax process, it’s important to understand how these tax types are different and therefore how you manage them should also be different.
I’ve noted a few of the differences below:
1. Income tax is imposed on the business or person that generates the income. Sales tax is imposed on the person (i.e., individual or business customer) that consumes the taxable property and services sold by the business.
The income tax paid by a business is their liability and their expense, whereas the sales tax liability of a business is generally the tax liability of someone else and not a business expense – sales tax is considered a pass through tax. With sales tax, a business is a sales tax collection agent for the government and the government says if you don’t collect and remit this tax correctly, it becomes your liability. (NOTE: This does not mean a business does not have a sales tax liability for property and service it consumes. However, the reporting and remittance of these sales taxes are generally handled by the business’s vendors.)
2. Income tax is reported and paid annually with quarterly estimated payments and an extension opportunity. Sales tax is reported and paid much more frequently but usually monthly with a recurring monthly due date of the 7th, 10th, 15th, 20th, 25th or 30th depending on the jurisdiction.
The income tax reporting is extraordinarily complex with multiple forms and schedules at the federal, state and local levels. The sales tax reporting is much less complex overall with no federal reporting but extensive local reporting in certain states. Additionally, depending on the state, there is a huge disparity in reporting detail for sales tax as there are certain returns that are very complex while others are quite simple.
3. Data for reporting income tax generally starts with the annual trial balance, which is a compilation of transactions, but sales tax generally starts with the monthly transactions.
This can result in massive and complex amounts of sales tax data each month due to the extensive and detailed reporting requirement in certain states. Additionally, the data must be available quickly in order to meet the monthly due dates – which as previously noted can be very early in the month.
Creating an effective sales tax process must account for the unique characteristics of sales tax. Namely the voluminous amounts of data and extremely small windows of time to process the data and returns each month. If not managed properly, what is otherwise a pass through tax will become the tax liability for your business.
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