For many small businesses, sales tax may be a part of life, especially if your business includes end user or ultimate consumer sales. If your business includes the sales of tangible goods, then you are more than likely required to compute, collect and pay sales tax to your state based on the goods that you sell in your business. But compliance can often be more complicated than it appears, based on your state’s particular laws regarding sales tax. Since this is a landscape that continues to shift as state’s balance their budget by increasing their sales tax income, here are 4 tips to assist you in handling sales tax in your business.
The Nexus of Your Sales
The reality is that you will owe sales taxes in any state where you are regularly conducting business. Here are a few points to keep in mind when expanding your business in regards to sales tax. First, if you are adding a new sales agent or representative in a state outside of the one where you currently conduct business, then you are likely going to be subject to sales tax in that new state. Additionally, if your business hires new employees in another state, you are likely to be subject to that state’s sales tax laws. Finally, if as a business you are now delivering and installing products in a new state, that may also make you eligible to follow that state’s sales tax laws. It is important to note that as your business expands, so you will your sales tax obligations.
Mandatory E-filing of Sales Tax Returns
Depending on your state, you may be required to file your returns electronically. If this is the case, then you or your bookkeeper can set up a regular reminder to file your return and pay your sales tax obligations to the state on a regular schedule. However, if you do a significant amount of business, you may have a higher obligation to pay into your state. Thus, you may be required to make your payment in an electronic format as well. Therefore, it is important to find out what limits, if any, your state has regarding the size of payment that can be made via check and what must be paid via electronic transfer.
Pre-Payment Options
Depending on the state or jurisdiction, your business may be required to pre-pay sales tax, based on what your anticipated sales will be for that quarter. Keep in mind that this often applies to those business that do a large amount of transactions throughout the quarter and those businesses that would typically have a larger sales tax obligation as a result.
However, if you do business in a variety of jurisdictions, then you may find yourself having to juggle multiple pre-payments and returns for each one. Therefore, you need to be sure to keep these dates in a calendar with reminders, so that your returns and your pre-payments are made accordingly. If you end up overpaying, depending on the state, you may be able to apply that amount to your next quarter’s sales tax obligations.
Reconcile Your Sales Tax Payable
Every quarter, you should be reconciling your sales tax payable account to your source documents. This will help you to make sure that your balance is accurate and that you are meeting your tax obligations. Here’s how you would complete this process. First, you need to identify the balance in your sales tax payable account. Then, add the total amount that you billed to your customers, before subtracting the total sales and use tax paid, before you receive any timely filing discount (if this is available in your state). Finally, reconcile this amount with your account’s current balance and re-class any discount or rounding balances to the proper ledger account in your general ledger. This will help you to make sure that you are accurately reporting and paying your sales tax obligations in the various states and jurisdictions that you do business in.
Understand that sales tax is a complicated process and that these tips are meant to assist you in meeting your obligations as a tax collector for the state that you operate in. However, if you are not keeping accurate records and making the proper payments, the state can assume what sales you are generating based on historical information and come after your business for those funds. As always, when it comes to taxes, the importance of using a qualified bookkeeper or accountant cannot be understated.
Patrick O'Hara, EA