Sales tax is managed at the state level, and sometimes at the city or jurisdiction level. For a business with tax obligations in multiple states, understanding the unique filing and remittance requirements for each state can be time-consuming.
Here’s a guide to understanding your sales tax requirements, some nuances to keep in mind when filing and remitting sales tax, and how to file and remit (pay) sales tax in each state to maintain compliance.
What’s in this article?
- Understand your sales tax requirements
- How to file and remit sales tax
Understand your sales tax requirements
The first step to compliance is understanding where you have sales tax requirements. Generally, 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-based, transaction-based, or both. These thresholds vary by state: learn more about what creates economic nexus.
Once you have determined where you have met economic nexus thresholds, you must register for a sales tax permit in those states. To register for a sales tax permit, you’ll need to provide general business information, and certain states charge a small fee for registering. Registration is done online, and you can review this comprehensive list to find the relevant registration link.
How to file and remit sales tax
Filing and remittance are often used interchangeably, but they are two different activities—and both are required to maintain compliance. Filing is when a business submits a sales tax return that details the sales activity for a taxable period and how much sales tax was collected. Remittance is submitting the tax collected to the appropriate tax authority, which could be a state or a city. Remittance is also often referred to as paying sales tax.
The reason these two actions are often coupled together is because sales tax returns and payment are generally due at the same time. While each business has a unique filing and remittance frequency, high-volume businesses are often required to file more frequently than small businesses. The tax authority will set the due date when you register to collect tax, but this can change as your business evolves. The state tax authority will notify you if your filing frequency has changed.
How to file a sales tax return
Filing a sales tax return involves reporting your sales transactions and tax collected for the taxable period. Each state has its own sales tax return format, but generally you are required to detail your gross sales, taxable and nontaxable sales, customer information, and the amount of tax collected.
Depending on the tax authority, you may be required to itemize this information by jurisdiction. For example, while some states require businesses to report at the city level, others only require consolidated state-level information. Maintaining detailed tax records is key for filing an accurate tax return.
There might be periods when your business has not collected any sales tax from customers. However, you may still be required to file a sales tax return. These are referred to as “zero returns,” and you are required to file them with the state by your due date.
When completing a sales tax return, businesses should indicate any appropriate exemptions. These vary by location, but some common types of deductions include resale exemptions, tax-exempt products, sales where taxes were collected by marketplace facilitators, and sales to exempt organizations.
Another challenging aspect of compliance is home rule states. These states allow individual home rule cities to administer their own sales tax and tax bases. The following are home rule states: Alabama, Alaska, Arizona, Colorado, and Louisiana. In these states, businesses are generally required to file a return in each individual home rule city, in addition to the state return.
How to remit sales tax
Similar to filing a sales tax return, the process of remitting tax varies by tax authority. There are various methods and timing requirements across the US. For example, California requires some businesses to file returns quarterly, but make monthly prepayments. However, aside from a few exceptions, most businesses will file and remit sales tax on the same due date. To avoid penalties and interest, ensure your tax payments are submitted by the set due date.
Each tax authority allows different payment methods for remitting sales tax, though most allow electronic payments such as ACH or electronic funds transfer, as well as credit and debit card payments.
Most states prefer businesses to file and remit online, using their own state portals. You can review this comprehensive list to find the relevant state tax authority link for filing and remitting sales tax.