12 Small Business Sales Tax Tips

A4J Quick Tip to Understand Sales and Use Tax:

Sales and Use Tax are different perspectives of the same thing. A seller collects and remits Sales Tax to their tax authority, while a buyer who wasn’t charged sales tax owes Use Tax.

You are the buyer when you buy things for your business that are not for resale and that you did not pay Sales Tax to the seller. For example, when you buy tools from an out of state supplier, and you use those tools in your business, then the purchase price of the tools is your Use Tax Liability.

You do not owe Use Tax on anything that you sell. Think of it this way: everything needs to be taxed where ever you are physically.

If you buy something as the end user you pay the vendor sales tax, just like you collect sales tax from your retail customers and remit it.

When a customer buys from you out of state and you ship it to them, you don’t charge sales tax unless you have a physical presence, aka Nexus (sales rep, storefront, etc), in the state where the customer is.

If you don’t charge them sales tax, then that out of state customer is responsible for paying their state’s sales tax on that item. It’s called Use tax, bc they are the end User. Flip it around and it goes the same way for you and anything you buy. If you’re going to resell it, the end user pays. If you are the end user, you pay.

You collect and remit Sales Tax on behalf of your customers to your state. When you buy things that are not for resale, but are used in your business or for yourself personally and you did not pay sales tax at the time of purchase, then you owe use tax. (Purchase price amount x your state’s sales tax rate = use tax).

These 12 rules will help keep your company in compliance with tax rules and regulations.

 

1. Don’t Neglect Nexus

Nexus, also known as sufficient physical presence, determines whether an out-of-state business selling products in another state is liable for collecting sales or use tax on sales in the other state.

If you answer yes to any of these questions, you may have a nexus in a new state:

Have you sent an agent or sales representative to a new state?

Delivered and installed a product in a new state on a regular basis?

Did you hire new employees that work from a remote location?

Each state is different so check each state’s sales tax laws so you can accurately calculate, file, and remit sales tax.

UPDATE: 2018, Click here to read our post on Out of State Sellers and the NEW ECONOMIC NEXUS.

 

2. Know your jurisdiction’s filing requirements.

 

E-filing is the law in many states. Some states require businesses with larger tax liability to make electronic payments. Some states do not have the infrastructure for online payments. It’s important to know the state payment options and requirements in each state you have a nexus in.

 

3. Know your jurisdiction’s prepayment requirements.

 

Some states require prepayment for larger tax amounts. Some of these prepayments are on a different filing schedule than your regular payments. Keep track of which states you are required to file in and what their position is on prepayments.

 

4. Reconcile your sales tax payable account. Reconcile this account with your source documents:

 

-Identify the balance of your account at the beginning of the accounting period.

-Add the total amount billed to customers. 

-Subtract the total sales tax paid, either electronically or by check, before timely filing discount.

-Use Tax you owe for purchases is not part of the Sales Tax Payable (liability) account when using Xero, as purchases owed will offset the tax collected from customers and the balance in the account will be incorrect. Click here to learn how to handle Use Tax in Xero.

-Re-class any discount or rounding balances to the proper general ledger account.

 

5. Verify that all checks you have issued to the Department of Revenue have cleared the bank.

 

Failure to due this might result in an outstanding sales tax balance. Review your process for receiving and sorting incoming documents, especially if you employ part time staff. E payments and E filing make tracking checks and payments much easier.

 

6. Keep up to date on filing frequencies on your tax calendars.

 

Filing frequencies change frequently. It’s best to check at the beginning of the year how often you’ll be required to file your sales and use tax returns. States often send notices to taxpayers several months in advance but if you don’t receive a notice, a filing frequency change may still have occurred.

 

7. Make sure you understand the taxability of new product offerings.

 

It’s important to understand the taxability of a new product in each state and nexus you are offering it. Product taxability laws are often inconsistent across state lines.

 

8. Ensure your customers’ tax-exempt status is updated and agrees with the terms of their exemption certificate on file. You can record your wholesale customer’s Sales Tax ID within their Xero Contact. You should always request proof of resale status from all wholesale buyers on their first order. Make the request part of your Ordering process.

 

Inaccurate or missing exemption certificates are a major cause of audits. If any of your exemption certificates have expired you will need to replace them. This is necessary so you can continue not to charge tax to your customers. You may need new exemption certificates from all of your customers if you have changed your company name or acquired a new company. Each state has different regulations on this.

 

9. Take care of any notices.

 

Failing to respond to notices in a timely manner may result in a levy to your bank account, a lien on your corporate officers, or suspension of your business license until it is resolved. The more electronic and automated your systems are for collecting, filing and remitting, the greater your chances of catching errors. Penalties are not cool and can easily be avoided. Don’t procrastinate!

 

10. Verify your jurisdictions using exact locations, not ZIP codes

 

ZIP codes can be divided and changed as areas become more densely populated. Using a rate from the wrong jurisdiction or leaving out a special district tax can lead to audits, penalties and return reconciliations. If you base your sales tax rates on ZIP codes, you risk applying the wrong rates and remitting sales tax to the wrong jurisdictions. The key to accurately identifying your jurisdictions is to pinpoint the correct destination or location of the transaction using data such as latitude and longitude coordinates. Yes, that’s what we heard. Eyes will cross especially when you’re in an Origin and Destination based state like California or Destination based like North Carolina.

 

11. Keep sales records in case of an audit.

 

Audits can significantly drain business time and resources. If you take the time now to review your process for keeping sales records, it will go a long way towards minimizing your costs in the event of an audit. When you review your process for keeping sales records, look for the following:

-Clear and complete information in your ledgers

-Easily accessible documentation

-Show the flow of each transaction

 

12. Consider sales tax automation

 

You want to minimize your risk of an audit while maximizing your efficiency. Sales tax automation saves you significant time and resources in the event of an audit and allows you to redeploy resources to areas that actually increase your revenue. AvaTax reduces your audit risk with sales tax services that calculate rates, manage exemption certificates, file forms and remit payments.