Sales tax is a pass-through tax that most businesses must charge and collect from customers at the point of sale. It is a percentage-based tax on products and services that state and local governments administer. Since sales taxes can vary by municipality, the tax implications can change depending on where your business is located.
Collecting and remitting sales tax requires you to do a little footwork first. To stay compliant with sales tax laws, you must:
- Figure out your sales tax collection responsibilities (otherwise called Nexus)
While most states have a sales tax, there are five that do not require sales tax collection: Oregon, Alaska, Delaware, New Hampshire, and Montana. The physical location of your business is not the only determining factor of where you pay sales tax, states have sales tax laws for e-commerce sellers once they hit different sales thresholds, so while you are located in California, you may be required to collect and remit sales tax in other states.
Pro Tip: It is always a good idea to ask your advisor about Sales Tax Nexus for an analysis of your compliance. Accountix can help.
- Apply for a sales tax permit with the appropriate state(s)
This license indicates that you can legally collect, and pay, sales tax in that state(s). Typically you will need to have your EIN, register electronically or via a paper form within the necessary state, and pay a fee (if applicable).
ProTip: Looking at multiple states? Accountix can help.
- Determine the sales tax rate(s) to use
There isn’t a standard sales tax rate that all states and counties use. Each tax agency sets its own rate, which is a percentage of a taxable product or service. For example, as of 2022 California has the highest state-level sales tax rate at 7.25%. As the sales tax collector, you need to know how much the sales tax rate is in the state and/or county you’re collecting for.
To do this, head over to your state website and look into:
- State sales tax rates
- County sales tax rate
Again, pay attention to the goods and/or services that are exempt from sales tax while you’re on your state’s sales tax web pages.
- Collect the tax from customers at the point of sale
Once you know the tax rate(s) you need to collect, you can calculate sales tax on taxable items at the point of sale. To determine how much sales tax to collect, multiply the price of the taxable items by the sales tax rate. Remember to exclude tax-exempt items and services, including resale products, from your calculation.
- Record collected sales tax in your accounting books
After collecting sales tax from customers, set it aside until the time comes to remit it to the state. Sales Tax Accounting can help you keep your collected and remitted sales tax records straight.
In sales tax accounting, you create journal entries when you collect sales tax from customers. The journal entry should show how much total money you received from the customer. Also break down how much of that incoming money is for the sale and how much is for sales tax.
When you remit it to the state, create a journal entry to reverse the initial record and decrease your Sales Tax Payable account. Without accurate and detailed records, you could lose track of how much money you owe the state, leading to overpaying or underpaying.
Pro Tip: Accountix can work with you to keep your records clean and clear for easy sales tax calculations.
- Report and remit sales tax to the appropriate states (aka time-to-pay)
When it comes to reporting and remitting sales tax, there are a number of variables by state, such as due dates (monthly, quarterly, semi-annually, or annually), payment methods (e.g., ACH debit, credit card), filing methods (e.g., electronically, over the phone, via mail), and sales tax reports (you can get this from your state department of revenue).
- In many cases, how often you report and pay sales tax depends on how long you’ve been in business and how much sales tax you collect. And, the amount of sales tax you collect may determine how you file and pay (e.g., electronically)
In the end, understanding, calculating, and paying your sales tax is an important business component. It is important that it is calculated and reconciled correctly and all done in a timely manner in order to avoid penalties.
Accountix can help you through every step of the process including registering, implementing, and managing the entire process so that you can focus on other important items of your business. With Accountix, if you want the partnership in your business to make sure this aspect is covered, we are here to support you.