Sales tax are put up by government on the sale of goods and services. As a business owner, you are responsible to collect and remit taxes to the authorities.
There are particular different types of sales tax systems to use throughout the United States. For instance, the main taxpayer is the seller or the purchaser. Some states imposed the taxes on the purchaser and the seller is responsible to collect and forward the tax. On the other hand, other states imposed taxes on the seller who passes it on to their customers.
Compliance with the collection and remittance is essential for the business not to be questioned and audited. Disregarding such actions can lead to growing risk and higher penalties.
More often, sellers found sales tax compliance as messy, complicated, and sometimes annoying. That is why CPA firms came to the rescue to offer their services so business owners can just focus on sales growth and revenue.
Services on sales tax, economic nexus evaluation, taxability determination, audit assistance, exemption certificate management, registrations, return preparation, and filing can be conveniently availed. End-to-end filing services up to remittance payment on your behalf is being offered.
This kind of service actually saves time in calculating and paying taxes so you can act accordingly. However, it is also ideal to have your own clear and even basic understanding of how Sales Tax and compliance work. Here’s the basics in sales tax compliance this year:
1. In what states do I need to register for a Sales Tax permit?
Register at the Department of Revenue website for your designated state. You are required to register in any state where you have “sales tax nexus”. The main forms of sales tax nexus are physical presence and economic nexus.
Physical presence – is where your business is registered, owners or employees resides, and inventory storage.
Economic nexus – is where you have most of your sales and transactions occur. The annual economic threshold may vary in a particular state.
Once a sales tax nexus and sales tax permit is secured, you can now move forward on knowing when to collect sales tax for online sales.
2. When to collect sales tax?
Product taxability- determine if your product is taxable and if you or the site you sell on is responsible to collect sales tax from customers. Certain types of products are taxed at different rates, you can refer on item tax codes here.
Who collects the sales tax?
In states where you have sales tax nexus, you likely only need to worry about collecting sales tax on your own site (Shopify, WooCommerce, Wix, etc.). If you sell on a third-party marketplace (Amazon, Etsy, Ebay, etc.), those sites are required to collect and remit sales tax for their sellers in all but three states as of 2021. Those states are KS, MO, and FL. So, you’ll still need to collect and remit sales tax for sales into those three states on marketplaces.
To simplify, ou need to collect sales tax for sales in states where (1) you have sales tax nexus, (2) your product is taxable, and (3) your sales are on your site or a third-party marketplace site in KS, MO, or FL. Then you can setup sales tax collection on all your necessary sales channels and products.
3. What to do with the Collected Sales Tax?
Make sure those entries for sales tax liabilities are properly entered on the balance sheet. To record received sales tax from customers, debit your Cash account, and credit your Sales Revenue and Sales Tax Payable accounts. When you remit the sales tax to the government, you can reverse your initial journal entry. To do this, debit your Sales Tax Payable account and credit your Cash account.
Each state has different deadlines for filing and remitting your sales tax. Generally, the more you collect, the more frequently you’ll need to file and remit sales tax. The sales tax filing will include the total sales in that state, how much of those sales were taxable, and the total sales tax amount to pay.
To sum up, the sales tax process can be less intimidating when you have general knowledge and partnered with tools to automate the sales tax process. And if possible, work with sales tax experts to help you navigate issues you are not familiar with.