How To Collect, Report, and Pay State Sales Taxes
If your business sells a product or provides a service that is taxable, and if you are in a " sales tax" state, you will need to set up a process to collect and pay sales taxes and file sales tax returns periodically.
If your business is selling in Alaska, Delaware, Montana, New Hampshire, or Oregon, no sales tax is charged, so you don't have to worry about this process. Lucky you.
This article will walk you through the steps involved in this process:
- Begin by registering with your state's taxing agency. If you sell in more than one state, you will need to register in each state. Your state will also have information on what products and services are taxable.
- Determine the sales tax rate or rates you must charge. It has been estimated that there are 11,000 tax collection entities in the U.S., so determining and collecting sales tax can be very complex The Tax Foundation has a downloadable table of state sales tax rates.
- Set up your processes to collect sales tax from your customers. You might be selling online, at a retail store, or at outside venues like flea markets and events.
- Gather your records for all your sales and the taxes through your business accounting system.
- Send reports to your state and, of course,
- Pay sales taxes to your state as required.
First, Register With Your State
First, go to the website of your state Department of Revenue and register for your sales tax permit.
You will first need to have your Federal Employer ID Number and all of the information about your business and its owners. Most states allow online registration, so have all the information ready before you begin the process.
Determine the Sales Tax Rate to Collect
The rate changes, depending on your location.
If you are selling in multiple locations, you must include the correct sales tax for each location. For example, if you are selling products in several cities or counties within your state, the correct amount must be collected from each locality. This gets complex if you have many places where your products are being sold. If you are selling in several states, you must also program the correct amount for each location within each state.
Collect Sales Taxes from Customers
After you have received your sales tax permit, you can begin collecting sales tax from customers. You must show the tax amount separately, so the customer can see the amount of the tax; this typically isn't a problem, since most sales receipts are programmed to show the amounts. If you are selling online, your "shopping cart" page will show the sales tax calculation. You will need to program the computer for the applicable sales tax amount or amounts.
What about resellers? These are people who are buying from you to resell to others. For example, if you are selling coffee in bulk, you might sell to a coffee shop. If they have a reseller's permit or resale certificate, you don't have to charge them sales tax.
What About Sales Tax for Online Sales?
The simple answer is that you must charge sales tax for in-state sales. Charging sales tax for out-of-state sales varies by state. It depends on your state and your tax status within the state. Read this article about collecting online sales taxes to find out the latest on this controversial subject.
Keep Records on Sales Taxes Collected
After you have collected the sales taxes, you must keep records on how much you have collected (these amounts go into the "Sales Tax Payable" liability account, in your accounting system. If you have an online accounting system, like QuickBooks, you can set up sales transactions to automatically post to this account.
Report Sales Tax Information to Your State
In addition to paying the state sales taxes you owe, you must also file periodic sales tax reports to your state department of revenue.
Most states now give you the ability to pay and report sales taxes online. Take advantage of this feature if you can.
Pay Sales Taxes to Your State
Check with your state to see when you must pay sales taxes. The frequency of payment depends on the volume of your sales. In most states, you must pay monthly if you have a high volume of sales, but at least quarterly in almost every state. Be sure you pay on time to avoid fines and penalties for late payment.
Some states give a discount for prepayment of sales taxes. This is definitely something to look into if possible.
Some Tips on Sales Taxes
- Sales taxes are determined based on location - either the location or the buyer or of the seller. Which one depends on your state. Check with your state's revenue agency for more information.. Check the most up to date state sales tax rates to be sure you are charging the full amount of the tax.
- If someone wants to buy from you and says they are a "reseller" or that they are buying for "resale," they need to show you a validreseller's permit. Make sure to keep a copy of this permit in case you are questioned by state sales tax agents.
- If you do business in several locations, within and between states, you might want to use a financial software program like QuickBooks to help determine sales taxes for various locations.
For more information, see this article with answers to common questions about sales taxes.