Collection: how do you collect sales tax?
It begins with accurately determining the total sales tax owed on your sales. You must carefully track all the sales and maintain proper books, including where the customer purchases your products/services and how that state taxes purchase. Let’s understand this further.
How can you determine sales tax?
A primary challenge is tracking the thousands of sales tax jurisdictions across states, cities, counties, and special taxation districts.
Sales tax rates vary from 0% to 10% across different locations.
Collecting the correct sales tax rate starts with knowing your nexus obligations, physical locations, and employees’ activity territories. Understanding your tax presence and connections in nearby jurisdictions ensures charging applicable rates.
For every sale, you need to:
- Keep track of the state the product or service is being delivered to
- Identify if the state is origin-based or destination-based
- If you have nexus in the specific states
- Determine the percentage combined sales tax for each state, city, and county to remit accurate sales tax and avoid penalties.
Some states provide rate lookup tools on their websites or rate charts that are updated monthly.
However, these manual options make it challenging to keep current everywhere. Sales tax automation and qualified experts overlooking everything for you can offer the most accurate and seamless rate determination.
If you’re looking for such a tool, you may want to book a demo with Numeral and understand how we can help you save time with sales tax hassles.
The impact of South Dakota v. Wayfair on online businesses and remote sellers
The Supreme Court’s 2018 Wayfair decision was a significant change for remote sellers operating online without physical presence in states.
It established substantial nexus based on economic thresholds—dollar amounts or transaction volumes.
Over 40 states now have laws defining sales, transaction, and revenue cutoffs high enough to drag small ecommerce businesses into nexus.
Thresholds can be as low as $100,000 in gross annual sales or 200 separate transactions into a state.
Even lacking physical nexus, ecommerce sellers must register and collect sales tax in any state where they exceed the economic threshold. Understanding the economic nexus laws where you sell products and services online is crucial.
Risks of incorrect tax calculation
The risks of collecting incorrect rates or amounts are high with complex multi-jurisdictional tax obligations. Common errors like charging the wrong percentage, applying outdated rates, or mapping customers to the wrong tax jurisdiction quickly add up.
Minor calculation errors could significantly impact tax liabilities down the road. Undertaxing in some areas and overcharging in others leads to headaches—collecting too little sales tax results in paying those out of pocket later. Collecting too much forces refunds to be issued to customers. Get rates and calculations right from the start to avoid issues.
Importance of invoicing and documentation
You also need to maintain proper invoices and documentation for all your sales. Invoices provide key details like place of sale, sales tax breakdown, taxability status, and exemption claims.
This helps prove diligent collection efforts if your business is ever audited.
Apart from audits, some states require you to separate state tax amounts instead of just the total purchase price. Those selling exempt transactions must also mark invoices as “Exempt” and reference qualifying exemption certificates provided by buyers.
With all these regulations in mind, let’s move to the next step—remitting sales tax. Once you have collected it from your customers, you must ensure proper filing and remittance to avoid penalties and audits.
Remitting sales tax: who remits sales tax in the us?
The responsibility for charging, collecting, reporting, and remitting sales tax in a sales transaction falls primarily on the seller.
While customers do owe sales tax on most purchases, the seller serves as an agent of the state in gathering this revenue.
Failure to collect tax from buyers does not relieve the seller from owing tax to the state.
Role of the seller
Sellers must obtain a sales tax permit or license in most states and register with revenue departments wherever they have sufficient physical or economic presence (known as nexus).
With a permit, the seller can legally collect sales tax from customers and is responsible for correctly calculating amounts due on invoices.
Beyond collecting sales tax, the seller must file regular returns and remit all tax revenue to appropriate agencies. Returns are typically submitted monthly, quarterly, or annually, depending on the state and volume of taxable sales.
Returns report total sales, exempt sales, taxable sales, and the sales tax due. Payment must be remitted along with the return by the due date to avoid penalties and interest. Overall, the seller bears the burden of adequately imposing, collecting, tracking, reporting, and paying sales tax in the jurisdictions where sales occur.
Role of the customer
Customers are responsible for paying the advertised amount, including any sales tax due at the point of sale. Any issues with tax charges must be addressed directly with the seller.
Customers who qualify for a sales tax exemption must also provide applicable exemption certificates to sellers as proof that sales tax should not be collected.
These certificates indicate how the goods or services will be used and that the customer is tax-exempt.
Sales tax vs. use tax: what’s the difference?
You may also generally hear two terms: sales tax and use tax. While they seem similar, they are distinct taxes that apply to different transactions.
Sales tax is a percentage tax paid when purchasing tangible products or services depending on the state of sale/purchase. If the seller has a nexus in the state where the sale takes place, they are responsible for collecting sales tax at the time of purchase.
Use tax is a sales tax you pay to use a product or service in a state. Here are some examples:
- Purchases made from out-of-state sellers who don’t collect local sales tax due to lack of nexus
- Items purchased for resale but then used personally
- Taxable goods bought in a state with a lower sales tax rate but brought home for use
Use tax aims to discourage tax evasion from out-of-state sellers and ensure equivalent taxation of goods regardless of origin. The same introductory tax rate applies but is paid directly to the state by the buyer rather than the seller. Retailers are not required to collect use tax.
When do sales tax and use tax apply, and who collects it?
Whether sales tax or use tax applies depends primarily on whether the seller has a nexus. If the seller has a physical presence or economic nexus in the state where the buyer resides, sales tax applies, and the seller must collect it. Without nexus, the seller has no obligation to collect tax, so the buyer owes use tax instead.
However, larger online sellers may now have to collect sales tax nationwide following the Supreme Court’s South Dakota v. Wayfair ruling.
This established an economic nexus threshold based on sales volume and transactions, which requires more out-of-state retailers to collect. This means sales tax is now charged on more online purchases for consumers.
For businesses, use tax typically comes into play when purchases are made from out-of-state suppliers before reselling items or incorporating them into finished projects. Even with more remote sellers collecting sales tax, use tax liabilities still need to be tracked on exempt inventory later used internally.
What are the requirements for remitting sales tax?
A business must take steps before legally collecting and remitting sales taxes. Failing to check these boxes off could make you non-compliant.
Business registered with a seller’s permit
After forming a business, one of the first regulatory tasks is registering for a seller’s permit (sometimes called a sales tax permit, reseller permit, or vendor’s license).
This authorizes your business to collect transaction taxes and is required in most states before applying sales tax. Permits are obtained by submitting a registration application along with any licensing fees to the appropriate state revenue agency.
When granted, the seller will receive a sales tax account number or tax ID used when filing returns. States normally issue permits fairly quickly after verifying a seller’s information. However, if the state cannot verify identity or legal business formation, it may conduct further investigation before approving the permit.
Physical or economic nexus in the state
The term nexus refers to a seller having sufficient physical or economic transactions in a state or county to be subject to their tax laws and regulations.
Nexus establishes a tax presence obligating the seller to register, collect, file, and remit sales taxes to that jurisdiction.
Historically, nexus was created by physical business locations, employees, inventory, trade shows, or advertising in the area. However, with ecommerce, states lost vast sales tax revenue as online sellers claimed no physical presence.
South Dakota v. Wayfair overturned this precedent by ruling that states can impose taxes based on economic nexus.
Having just one transaction or minor advertising activity likely doesn’t reach nexus. However, exceeding certain sales, transaction, or inventory thresholds can trigger tax obligations without physical presence.
But there’s one thing to note—sales tax nexus and regulations vary greatly based on the state and even the cities and counties.
That’s why you need a sales tax service that handles everything for you, with minimal intervention from you, while also guaranteeing 100% accuracy so you do not pay penalties.
What products and services are taxable and exempt
All but five US states have a statewide sales tax—exceptions are Alaska, Delaware, Montana, New Hampshire, and Oregon.
But, not all goods and services qualify as taxable sales. States typically tax retail sales of tangible personal goods and certain services. General rules of thumb include:
- Physical products are taxable unless specifically exempted
- Services are generally not taxable unless specifically included
- Wholesale sales are usually exempt
- Retail sales are taxable.
However, states differ significantly in what services they tax. For example, only a few states tax professional services, while most impose sales tax on repair and installation services. Other exceptions like groceries, clothing, and prescription medicine also exist.
The process to remit sales tax
With robust tax collection procedures in place, businesses must tackle the regular process of remitting the sales tax they gather to state authorities. Keeping tax payments timely and reporting fully avoids non-compliance.
Filing frequency and due dates
Most states require monthly, quarterly, or annual filing cycles depending on seller size and taxable sales volume. Higher sales volumes generally mean more frequent filing is needed. For example, small businesses may only need to file an annual return. However, retailers collecting over $20,000 annually must often file monthly or quarterly returns.
Due dates vary but are typically the 20th of the month following the reporting period. For quarterly returns, payment cycles often align with calendar quarters ending March, June, September, and December. Returns and payments for a given quarter are then due a month later.
To avoid interest and penalties, sales tax must be paid by the due date, regardless of when the state receives payment. Have funds withdrawn a few days early or postmark checks on time. Setting calendar reminders for recurring due dates prevents missed filings.
How to file a sales tax return
Completing and submitting the sales tax return summarizes taxable sales activity and reconciles amounts collected against taxes owed. Required forms, processes for filing, and payment methods vary by state.
Many tax authorities now offer online filing of sales tax returns through revenue department websites or third-party systems. Online filing platforms walk users through the process step-by-step, perform some calculations automatically, and warn about inconsistencies that could trigger an audit.
However, online systems generally don’t support filings across multiple states. Sellers operating in several jurisdictions may have to use separate state systems or rely on spreadsheet templates. This quickly becomes administratively burdensome. Automated sales tax software that handles multi-state filing centrally provides a big advantage.
You can also use Numeral to help file your store’s sales tax return seamlessly.
Payment methods for remitting sales tax
Acceptable payment methods include checks, money orders, ACH withdrawals, wire transfers, and sometimes credit cards. Start the payment process early enough to ensure the state receives funds by the due date.
If filing online, returns often cannot be submitted until payment is initiated through the website. Mailing paper checks means allowing time for postal delays. Forgetting to sync payment with the return deadline could still result in penalties for lateness.
Common pitfalls in sales tax remittance
Staying fully compliant with sales tax obligations from registration and collection to filing and payment is no simple task, especially for sellers operating in multiple states. Unfortunately, the complexities involved leave plenty of room for good-faith mistakes and accidental non-compliance.
Consequences of non-compliance
The penalties for late filings or underpayment can quickly wipe out profits. Consequences may include:
- Assessment of penalties up to 25% of tax due
- Interest charges of 10% or more annually
- Loss of important sales tax exemptions
- Tax liens or levies against the company
- Revocation of sales tax permit
- Mandatory security deposits for future filings
- Tax audit and investigation
In severe cases of repeated non-compliance, owners or executives face potential jail time and dissolution of the business altogether. The risks make compliance an extremely high priority.
Importance of collecting sales tax exemption certificates
Sales tax exemptions for resale, nonprofit, and manufacturing purposes help sellers minimize unnecessary collection. But, failing to charge tax doesn’t negate the seller’s liability if unable to prove valid exemptions during an audit.
You may notice that collecting and remitting sales tax in the US isn’t the easiest thing out there. That’s why there are a multitude of solutions that help you file taxes with 100% accuracy so you no longer have to
How to pick a sales tax solution that makes sales tax easier
Given the constantly changing complexities of US sales tax laws across jurisdictions—technology and automation are critical for easing the compliance burden. It would be best to have a robust solution to eliminate manual processes and get up-to-date and reliable sales tax management.
Features to look for in a sales tax solution
When picking a sales tax solution, you want to look for a few specific features that help make things easier:
- Automated rate calculation to ensure accurate, up-to-date collection even across jurisdictions
- Built-in invoicing so it applies tax rates correctly with the required details for exempt sales
- Remittance management to handle filings, payments, and due dates automatically
- Multi-state capabilities through a single consolidated platform
- Nexus analysis tools that help identify filing obligations and monitor economic thresholds
- Exemption certificate management to collect and store data for valid exemptions
- Reporting to help with filing reconciliation and audit support if needed
- Alerts and notifications for rate changes, due dates, and other vital events
- Integration with ecommerce platforms, POS systems, accounting software
There are a multitude of solutions on the market. However, most are either fully automated or fully manual—both of which have problems. For instance, automated services like TaxJar and Avalara offer negligible support, especially when there are incorrect filings—you can solve them yourself.
Numeral solves these by merging technology with human expertise, allowing us to give you a 100% accuracy guarantee—if we file incorrectly, we bear the penalties.
How a numeral saves time and eliminates penalties
Numeral provides end-to-end sales tax management, from registrations and filing to communications and audits. Our team stays on top of constantly changing regulations so you can focus on customers rather than administrative burdens.
With automation taking care of calculations, reporting, and payments, you spend less than 10 minutes monthly on sales tax compliance—down from the multiple hours!
Numeral also integrates with top ecommerce platforms like Shopify and POS systems for easy connectivity. Numerous compliance safeguards provide confidence and protection from penalties or interest.
A solution like Numeral is worth exploring for any seller struggling to keep up with multi-state tax obligations.
Purpose-built technology, automation, and expertise lift the sales tax burden so companies can reach their potential.
When the heavy lifting is handled behind the scenes, sales tax fades into the background, and you can focus solely on growing your business.
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