Becoming sales tax compliant is a process that requires multiple steps. First, businesses operating in the US will have to determine where their tax obligations lie. Then, they will register to collect tax in those states, collect sales tax from customers and finally, report and file tax returns with the appropriate tax authorities.
In this article, we'll briefly cover the steps to achieve compliance, including reporting sales tax and filing returns.
What's in this article?
- Understanding your US sales tax obligations
- Registering to collect US sales tax
- Collecting US sales tax from your customers
- Reporting and filing US sales tax
Understanding your US sales tax obligations
In the US, out-of-state and foreign 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 are either revenue- or transaction-based, or both. For example, in Nevada, businesses only need to collect sales tax from customers if they have exceeded US$100,000 in revenue or 200 transactions from customers in Nevada. Some states only have revenue thresholds in place, while others require businesses to exceed both the revenue and transaction thresholds before collecting sales tax. As sales tax is governed at the state level, these thresholds vary across the US.
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, shop 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.
But just because a business has met a nexus threshold in a US state does not mean that it is required to collect sales tax. Not all goods and services are taxable. If the items that a business is selling are not taxable, then the business is not required to collect sales tax on those items. However, you may still have an obligation to register. We recommend that businesses work with a sales tax professional to determine whether they need to register in this situation.
Registering to collect US sales tax
Before collecting any sales tax from customers, businesses should ensure that they are properly registered with the relevant US state tax authorities. In the US, businesses must register for sales tax permits with each individual state.
There is an exemption for states participating in the Streamlined Sales and Use Tax Agreement (SSUTA). This agreement was created to simplify the sales tax registration process. Currently, 24 states have passed legislation to conform to the SSUTA. These are Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.
Businesses can register for the Streamlined Sales Tax Registration System (SSTRS). Once registered, businesses will set up accounts individually with each US state and will need to register separately if they have sales tax obligations in any non-SSUTA-conforming state.
Collecting US sales tax from your customers
Once a business has registered and determined the correct tax rate, they can begin charging and collecting tax from customers. Sales tax rates vary across the US, and not all products and services are considered taxable. Most US states have a state-wide sales tax rate, and many states have additional local sales tax rates at the county, municipal and district levels. Determining the correct sales tax rate for a particular state would mean adding the state-wide sales tax rate to any local sales tax rates.
To determine the correct sales tax rate, businesses should research each state and jurisdiction individually to ensure that they're collecting the correct amount of tax. States usually require businesses to collect sales tax in one of two ways:
- Origin-based sales tax collection
- Destination-based sales tax collection
This concept is commonly referred to as "sales tax sourcing." Businesses that are based in states with origin-based sales tax sourcing may be required to collect sales tax based on a location other than the customer's address, such as the business's location. For example, businesses based in an origin-based state, such as Illinois, would determine the sales tax rate at their home, warehouse, shop or other headquarters. The business would then charge this sales tax rate to all its customers in Illinois.
Businesses that are based in states with destination-based sales tax sourcing are required to charge the sales tax rate at the customer's "deliver-to" or other destination-based address. As the business, you are required to charge the sales tax rates where your customer is located. Most states use this type of sales tax sourcing. Interstate sales are always subject to the destination-based tax collection.
Reporting and filing US sales tax
Once a business has collected sales tax from its customers, it will file a sales tax return and remit the sales tax collected to the correct state or other local tax authority. Each tax authority's website will have details on how to file your tax return and your due date. Due dates vary from state to state, and the frequency with which businesses must file a return will also vary. When a business registers for a sales tax permit, the state will give them a filing frequency.
Large companies with a higher tax liability will often file more frequently (monthly), while smaller companies may only be required to file quarterly or annual returns. Filing on time is the best way to avoid the penalties and interest that come with a late filing.
Learn about how sales tax is reported, filed and remitted in each US state.
Even if a business has not collected sales tax during a reporting period, they may still need to file a return. These are called "zero returns". Although the business will not remit any tax to the state, it is still required to file a return.
Managing sales tax reports for multiple states can be time consuming, so many companies turn to sales tax automation software to manage their compliance. These tools can manage various activities, such as nexus monitoring, sales tax registration, calculation and collecting, in addition to automating sales tax reporting.
Learn how to evaluate tax automation software.