Sales tax remittance is when businesses pass along the sales tax collected from their customers to the appropriate tax authority. When a customer purchases a taxable item, the retailer adds the relevant sales tax to the price of the good or service, then pays this tax to the state or local tax authority, usually on a monthly, quarterly, or annual basis. Local and state governments use these funds to support public services such as schools, roads, and emergency services.

As of April 2024, average combined state and local sales tax rates in the United States range from 0% in states with no sales tax to 9.56% in Louisiana. For businesses that operate in multiple jurisdictions, remitting tax properly means keeping track of multiple tax rates, rules, and remittance schedules. Modern software solutions automate many aspects of tax collection and remittance to make this process more manageable.

Below, we’ll explain how sales tax remittance works and what businesses need to know to stay compliant.

What’s in this article?

• How sales tax in the United States works generally
  
• When is sales tax remittance required?
  
• Sales tax remittance process and deadlines
  
• How to calculate sales tax liability
  
• How to register for sales tax permits
  
• Best practices for collecting sales tax
  
• How to complete your sales tax return
  
• How to use digital tools for sales tax remittance
  

How sales tax in the United States works generally

In the US, sales tax is an indirect tax imposed primarily at the state level, although local jurisdictions such as counties and cities can also levy taxes on the sale of goods and services. This tax is calculated as a percentage of the price paid by the purchaser and is collected by the retailer at the point of sale. Businesses are responsible for remitting these collected taxes to the appropriate tax authorities.

Sales tax can differ significantly from one state to another. Some states have high state sales tax rates combined with local taxes, while others have lower rates or no sales tax at all. Tax rates and rules also vary widely for different types of goods and services. Sales tax typically applies to tangible personal property (e.g., clothing, electronics, furniture), digital goods (e.g., software) and some services, but the specific items subject to tax vary from state to state. Some states exempt certain necessities such as groceries and prescription drugs, while others tax those items at full or reduced rates.

Businesses are required to collect sales tax in states where they have a “nexus,” which generally means a physical or economic presence. This can include having a physical store, employees, or inventory, or exceeding a certain threshold of sales within the state. If a customer buys an item from an out-of-state seller that does not collect sales tax, they might have to pay a “use tax” to their own state. This is meant to ensure that all purchases are subject to taxation regardless of where the seller is located.

Certain businesses or organizations are exempt from paying sales tax, such as nonprofit organizations and government entities. Businesses that purchase goods for resale can also typically provide a resale certificate to avoid paying sales tax on those items.

When is sales tax remittance required?

Different states and localities have their own rules regarding how often a business must submit sales tax to authorities. Typically, the frequency of remittance is determined by the amount of sales tax a business collects, with higher collection amounts generally requiring more frequent payments.

• Monthly filings: Businesses that collect substantial amounts of sales tax are often required to file monthly. This is generally the rule for larger businesses or those with high sales volumes.
  
• Quarterly filings: Smaller businesses that collect less tax might be allowed to file quarterly. This reduces the administrative burden on smaller enterprises.
  
• Annual filings: In some cases, particularly for very small businesses or those with minimal sales tax collections, annual filing might be permitted.
  

The specific thresholds and rules differ from state to state, and businesses are notified of their filing frequency by the state tax authority when they register for a sales tax permit. As a business’s revenue changes, the state can change its filing frequency.

Sales tax remittance process and deadlines

Before a business collects sales tax, it must register with the appropriate state’s department of revenue to obtain a sales tax permit. This registration allows the state to track the remittance of sales tax and ensures the business is recognized as an authorized collector of sales tax.

As transactions occur, the business collects sales tax from customers based on the applicable rate for the location where the sale is made. Businesses must keep records of all transactions that involve sales tax. These records must specify the amount of tax collected and the tax rate applied.

Depending on the state and the sales volume, businesses will file their sales tax returns monthly, quarterly, or annually. The return will detail the total sales tax collected and must be submitted even if no tax was collected during the period. Along with filing sales tax returns, businesses must remit the collected taxes to the state. This is usually done through an online portal provided by the state’s tax authority.

The deadlines for filing sales tax returns and remitting payments vary by state. Typically, returns are due on a specific day of the month following the reporting period. For example, quarterly filers in New York have until 20 days after the quarter ends to submit their tax returns and payments. Businesses that miss these deadlines are subject to penalties and interest.

How to calculate sales tax liability

Here’s how to calculate how much sales tax you owe:

• Determine the applicable sales tax rate: First, identify the correct sales tax rate that applies to the goods or services you’re selling, which will be a combination of the state sales tax rate and any local rates. This combined rate can vary depending on the state, county, and city. Some products and services might be taxed differently so it’s important to understand the specific tax rules for your product category and location.
  
• Record total taxable sales: Keep a record of all sales transactions that are subject to sales tax.
  
• Calculate total sales tax collected: Multiply the total taxable sales by the applicable sales tax rate. If different items have different rates or if sales span different jurisdictions with varying rates, calculate the tax for each item or batch of items separately and then add up these amounts.
  
• Adjust for discounts, returns, and exemptions: If you offer discounts or accept returns, adjust the taxable sales amount accordingly before you apply the tax rate. Subtract any sales that qualify for tax exemptions.
  
• Check for additional taxes and fees: Some jurisdictions might require additional fees or taxes beyond the standard sales tax (e.g., environmental fees, tourism taxes). Include these in your total liability if they apply to your sales.
  
• Compute total liability: Add up all the taxes collected across different jurisdictions and for different types of sales to get your total sales tax liability for the reporting period.
  

How to register for sales tax permits

Businesses must register for a sales tax permit to legally collect sales tax from customers. Here are the steps typically involved in this process:

• Determine where you need to register: Before you apply for a sales tax permit, determine where your business has a nexus, either due to physical presence such as a store or office or economic presence through sales thresholds. Then, ensure the product or service you are providing is taxable.
  
• Prepare necessary information: Most states will require basic information about your business, including your federal Employer Identification Number (EIN), business type (e.g., sole proprietorship, LLC), personal identification such as a Social Security number for sole proprietors, and detailed information about what you sell. Some states might require additional details about your estimated sales tax liability.
  
• Choose your registration method: Most states have online registration processes, which you can typically find on the website of the state’s department of revenue or a similar agency. Alternatively, in some states, you can register by mailing in a paper form.
  
• Complete the application: Fill out the application with all required information. This will include your business details, personal information, and specifics about your business operations. Enter all information accurately to avoid any delays in processing. You’ll also need to pay any applicable fees.
  
• Receive your sales tax permit: Once your application is processed, you’ll receive a sales tax permit or license. This permit might have an expiration date or it might be valid indefinitely, depending on the state’s rules. Research any renewal requirements.
  
• Display your permit: Some states require you to display the sales tax permit at your place of business in a location that’s visible to customers.
  

Best practices for collecting sales tax

Here are some best practices for collecting sales tax:

• Use technology: Tax automation software can be very helpful in calculating, collecting, and remitting sales tax. This technology can automatically apply the correct tax rates and rules based on location, which can minimize errors and administrative burden. If you have an ecommerce business, integrate this tool directly with your shopping carts and accounting software.
  
• Regularly update tax rates and rules: Sales tax laws and rates can change frequently. Set up a system for regular updates to your tax tables or use tax software that provides real-time updates. This helps you stay compliant, especially if you operate in multiple states or sell a wide range of products.
  
• Understand nexus regulations: Stay informed about nexus thresholds and obligations in each state where you conduct business. Economic nexus can trigger tax obligations based on sales volume or transaction count, regardless of physical presence.
  
• Document everything: Keep meticulous records of all sales transactions, tax collections, remittances, invoices, exemption certificates, and correspondence with tax authorities. This is important both for tax filing and in the event of an audit.
  
• Work with experts: Tax professionals or legal advisers who specialize in sales tax can provide you with valuable insight and help you address complicated tax scenarios. This is particularly important during business expansions, audit preparations, or when you enter new markets.
  
• Plan for exemptions and resale certificates: Develop a clear process for handling sales tax exemptions and collecting resale certificates. This involves verifying the validity of certificates and keeping them on file.
  

How to complete your sales tax return

Here’s a step-by-step guide to completing your sales tax return:

• Collect your sales info: Start by gathering detailed records of all your sales transactions. These should include how much you sold, what was exempt from taxes, and the sales tax collected for each type of product or service. It’s a good idea to keep sales info organized by month or quarter to make the following steps easier.
  
• Check the latest tax rates: Tax rates can change based on local decisions, new laws, or other factors. Always verify the current rates for each jurisdiction to which you owe sales tax before you prepare your return. Many state and local tax authorities have online tools or downloadable rate tables to help you stay up-to-date.
  
• Calculate what you owe: For each jurisdiction, multiply your taxable sales by the corresponding tax rate. Do this separately for each rate if you’re working with multiple tax jurisdictions or different rates for different types of products. This step gives you the total tax amount you should have collected from customers.
  
• Match what you collected with what you owe: Now it’s time to reconcile the tax you’ve collected against what you calculated. If you find you’ve collected more or less than you owe, you’ll need to adjust this value in your tax return. This can happen due to rounding differences, incorrect tax applications, or other reasons.
  
• Factor in any credits: If you have any credits from overpayments in previous periods or if you’ve made any prepayments, now is the time to apply these. Assure that you have documentation for any credits you claim, as tax authorities might require proof in the event of an audit.
  
• Fill out the return forms: Take your reconciled figures and start filling out the tax return forms for each jurisdiction. Be meticulous and ensure that each field is completed accurately. Online systems typically guide you through this process and automatically carry forward relevant information, which helps avoid manual errors.
  
• Review everything: Before you submit, review your forms carefully. Ensure you haven’t missed any fields and confirm that all taxable and exempt sales are reported correctly. This is your last chance to catch errors before you file.
  
• Submit and pay: Once you’re satisfied that everything is correct, submit your returns. If you owe money, ensure your payment goes through before the deadline to avoid penalties. Online payments are faster and safer, and you usually get immediate confirmation of receipt.
  
• Keep records: After you file, keep electronic or physical copies of your returns, any payment confirmations, and supporting documents. Keep them easily accessible, such as in labeled folders.
  
• Set up reminders: Sales tax returns are recurring obligations. Create reminders in your calendar for all upcoming due dates. Consider setting the reminders a few weeks in advance to give yourself enough time to prepare the next return without rushing.
  

How to use digital tools for sales tax remittance

Using digital tools like Stripe Tax to manage sales tax remittance can make the process faster, easier, and more accurate. Here’s how to use Stripe Tax for sales tax calculation, collection, and remittance:

• First, integrate Stripe Tax into your existing business systems. If you’re already using Stripe for payments, just add Stripe Tax to your Stripe configuration.
  
• When a customer makes a purchase, Stripe Tax automatically calculates the appropriate sales tax based on the product type, the customer’s billing and shipping address, and the applicable tax rules and rates for that location.
  
  • Stripe Tax is updated in real time to reflect changes in tax rates and rules across different jurisdictions, which means you don’t need to manually track rate changes or update your systems when they occur.
    
  • Stripe Tax shows customers the calculated tax during the transaction process, which can increase customer satisfaction and reduce the risk of cart abandonment due to unexpected charges.
    
• Stripe Tax provides detailed reports and analytics on your tax collection and remittance. You can view summaries of the tax amounts collected and due, sorted by jurisdiction. This data helps you prepare accurate tax returns and assess your sales tax liabilities.
  
• While Stripe Tax automates the collection and calculation of sales taxes, you’ll still need to file and remit taxes to the appropriate authorities. Some regions might allow direct integration, which lets Stripe Tax assist with the remittance process.
  
• Stripe Tax stores and organizes records of all transactions, tax calculations, and filings so they are easily accessible in the event of an audit or review.