Becoming sales tax compliant is a multistep process. First, you determine where you have tax obligations. Then you register to collect tax in those states, collect sales tax from customers, and finally, report and file tax returns with the appropriate state tax authorities.
In this article, we’ll briefly cover the steps to compliance, including how to report sales tax and file returns.
What’s in this article?
- Understanding your sales tax obligations
- Registering to collect sales tax
- Collecting sales tax from your customers
- Reporting and filing sales tax
Understanding your 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 $100,000 in revenue or 200 transactions from customers in Nevada. Some states only have revenue thresholds in place, or they require businesses to exceed both the revenue and transaction thresholds before collecting sales tax. Since 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, 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.
But just because you have met a nexus threshold in a state does not mean you are required to collect sales tax. Not all goods and services are taxable, and if the items you are selling are not taxable, then you are not required to collect sales tax on those items. However, you may still have an obligation to register. We recommend working with a sales tax professional to determine if you need to register in this situation.
Registering to collect sales tax
Before you collect any sales tax from your customers, ensure you are appropriately registered with the 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 SSUTA: 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 state and will need to separately register if they have sales tax obligations in any non-SSUTA-conforming state.
Collecting sales tax from your customers
Once you’ve registered and have determined the correct tax rate, you can begin to charge and collect tax from your customers. Sales tax rates vary across the US, and not all products and services are considered taxable. Most states have a statewide 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 statewide sales tax rate plus any local sales tax rates.
To determine the correct sales tax rate, research each state and jurisdiction individually to ensure you’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, if your business is based in an origin-based state such as Illinois, you would determine the sales tax rate at your home, warehouse, store, or other headquarters. You would then charge all your customers in Illinois that sales tax rate.
Businesses that are based in states with destination-based sales tax sourcing are required to charge the sales tax rate at the customer’s “ship-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 sales tax
After 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 tax authority’s website will have details on how to file and your due date. Due dates vary from state to state, and the frequency in which you file a return may also vary. When you register for a sales tax permit, the state will give you a filing frequency.
Large companies with a higher tax liability will often file more frequently (monthly), and smaller companies might 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 delinquent filing.
Learn how to report, file, and remit sales tax in each state.
Even if you have not collected sales tax during a reporting period, you may still need to file a return. These are called “zero returns.” While you will not remit any tax to the state, you are 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 activities such as nexus monitoring, sales tax registration, calculation and collecting, and automating sales tax reporting.
Learn how to evaluate tax automation software.