Sales tax is managed at the state level, with each state having its own sales tax rate, laws, and product taxability rules. Because of that, manually trying to manage sales tax compliance for a growing business can be time-consuming. First, you must understand where you have sales tax obligations, which means researching state sales tax nexus laws. Then, you must calculate the correct rate and then collect, file, and remit sales tax to each state.

However, there is an easier way to manage the steps to compliance. Below, we’ll explain how to use a sales tax automation solution to save time while remaining compliant.

Note that this is general sales tax information, and you should consult an expert for advice specific to your business.

What’s in this article?

• What is sales tax automation?
  
• How to automate your sales tax compliance
  

What is sales tax automation?

If you have met a sales tax nexus threshold, every transaction a customer makes on your website or in your store requires a sales tax calculation. These calculations vary based on details such as the customer’s location, your business location, the good or service you are providing, and the sales price of the product. Once you collect sales tax from your customers, you are required to report, file, and remit the tax by a due date, which varies by state.

A sales tax automation solution can simplify these compliance tasks, including nexus monitoring, filing, and remittance. Automating your sales tax management workflows by outsourcing to a provider can save you time while avoiding errors of manually managing compliance.

How to automate your sales tax compliance

Sales tax compliance is a multistep process and is detail-oriented, but automation can make compliance easier. Each step to becoming sales tax compliant can be automated. We’ll explain how to automate the aspects of the sales compliance process below.

Nexus monitoring

In the US, businesses are required to collect sales tax from customers when they exceed certain thresholds. These thresholds are referred to as economic nexus thresholds, and they can be revenue based, transaction based, or both. Because sales tax is governed at the state level, these thresholds vary across the country.

For example, in Nevada, businesses need to collect sales tax from customers only if they have exceeded $100,000 in revenue or 200 transactions from customers in Nevada. Certain states have only revenue thresholds or require businesses to exceed the revenue and transaction thresholds before collecting sales tax.

Businesses can also meet sales tax obligations by having a physical presence or physical nexus in a state. Examples of business activities that can create physical nexus include:

• Location: An office, warehouse, store, or other physical place of business. Storing inventory often creates physical nexus.

• Employees: Having an employee, contractor, salesperson, installer, or other person doing work for your business in a state.

• Events: Selling products at a trade show or other event.

Because each state has its own nexus thresholds, manually monitoring your nexus requirements can be time-consuming as your business grows. It involves manually tracking your sales and researching each state’s nexus thresholds. As soon as you hit a threshold, you are required to register to collect sales tax, so you’d have to constantly be monitoring for each state you generate sales in. Sales tax automation can help by analysing all your sales transactions and alerting you when you are approaching or have exceeded a nexus threshold in a state.

Registration

Once you determine you have sales tax obligations in a state, your next step is to register for a sales tax permit. Those permits are specific to each state, and you must register for a permit in each state where you have sales tax obligations.

Because each state has its own set of registration forms and processes, manually registering for a sales tax permit in multiple states can take time away from other business activities. Many sales tax automation solutions will register for a sales tax permit on your behalf as soon as you have met a nexus threshold.

Calculation and collection

Most states have a statewide sales tax rate, and in many states, there are additional local sales tax rates at the county, municipal, and district levels. A sales tax rate for any particular state would include the statewide sales tax rate plus any local sales tax rates.

There are more than 11,000 tax jurisdictions in the US, all with different rates and regulations. Five states do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, there could still be local sales tax rates to consider in these states.

To manually determine the correct sales tax rate, you would research each state and jurisdiction to ensure you’re collecting the correct amount of tax. This step is where a sales tax engine can be most beneficial. Manually calculating sales tax rates can waste time and open opportunities for errors and incorrect calculations. Charging the incorrect amount of sales tax is bad enough, but overcharging sales tax to your customers can lead to a poor customer experience, and undercharging customers can result in you paying the difference out of your pocket.

A sales tax automation solution will automatically apply the correct amount of sales tax and collect from your customers. As states or cities change their sales tax rate, the provider should make those adjustments in real time, so you are always collecting the right amount of sales tax.

Filing and remittance

Once you collect sales tax from your customers, you will file a sales tax return and remit the sales tax you collected to the correct state or other local tax authority. Each state tax authority’s website will have details on how to file and your due date. Due dates vary by state, and the frequency with which you file a return might also vary. Filing on time is the best way to avoid the penalties and interest that come with a delinquent filing.

Even if you have not collected sales tax during a reporting period, you might still need to file a return. These are called “zero returns,” and though you will not remit any tax to the state, you are still required to file a return.

Each state has its own sales tax return format and requires different details when it is time to report sales tax collected. Not only does sales tax automation ensure you never miss a filing due date, it will also complete the necessary returns quickly and accurately.