Sales Tax Compliance

Dealing with Sales Tax for Small Businesses

Sales Tax Compliance

Written by Steven Miller, CPA       August 30, 2018

 “Do I have to collect sales tax?” For small-business owners, this can be a challenging question, but it just might be the most natural part of the process. If you do need to charge tax, a host of other issues come up: And in Texas, you may find yourself in a sales tax audit whether you report them or not.

Ask yourself, “Am I in compliance?”

  • “How do I determine what rate(s) of sales tax to collect?”
  • “What don’t I know that will create problems for me later?”
  • “Where do I apply for a sales tax license, a resale license or others?”
  • “How do I file a return? When and where do I file it?”

The answers to these questions vary depending on some factors which include your state, your products and/or services, where your sales are, and even how many purchases you make.

Keep in mind that you don’t pay the sales tax, your customers do. You just collect it and remit it to the appropriate tax jurisdiction.  But you are held legally responsible if you don't correctly collect it and pay it over to the government.

Don’t ignore the issue!

Unpaid taxes have penalties and interest and come at the worst possible time (never forget Murphy’s Law).  “What happens in a sales tax audit?” is not a question you want to be asking.

So let’s discuss some of the basics for complying with sales tax laws. Remember that this is a general outline. You’ll want to verify each and every detail because each business has its own characteristics.  Requirements vary with each state as well as many cities, where you need to collect and remit the tax.

1. Registering for a sales tax permit or license.
Determine if you need to collect sales tax and on what goods or services the taxes must be collected.  

If you need to get a sales tax permit, the state government website provides a lot of information.  Probably too much information.  It’s against the law to collect sales tax without a license.

Some states charge a fee and renew your permit every so often.  Texas does not. 

Finally, once you get your permit, post it at your business as a way of notifying your customers you are legally eligible to collect the tax.

2. Collecting sales tax.
If your business has a physical location (or locations), you’ll need to configure your point of sale software to charge the appropriate sales tax for each area such as state, local, MTA, etc. rates. Your sales tax obligations may differ based merely on the physical location.

Some products and services are exempt from sales tax while others are not.  Texas may have a sales tax on a food item with sugar while a similar item lacking sugar is exempt.  So you want to be careful and detailed in your analysis.

Let’s complicate the issue even more. Consider internet or foreign sales. Until June 21, 2018, a ruling by the Supreme Court of the United States (South Dakota v. Wayfair, Inc.), only businesses with a physical presence in a state could be taxed by that state.

Now, economic and virtual contacts with a state may be enough to trigger a tax collection obligation. That means online businesses and potentially others might be soon collecting and paying sales taxes in thousands of different jurisdictions around the country, each with its own tax rate.  Doesn’t that sound like fun?

It is evident that doing all this on your own is difficult and time-consuming to get it right.  Did I mention that the rules often change? That’s why many online sellers use third-party solutions that integrate with their checkout and invoicing systems.  There is sales tax automation software that is specifically designed to help you keep everything straight in the world of sales tax calculation and collection.

These systems achieve the most critical sales tax step for your business: keeping track of what you’ve collected, and from where, so you can send it all to the right places. They also tend to be expensive.

3. Filing your sales tax return.
The actual filing of returns is typically the least problematic part of the process. You can file your taxes and submit your payments online with each state since they are happy to collect the money faster and do less work processing the reports. 

Your amount of sales typically determine how often you must deposit and report.  Texas has monthly, quarterly, and annual reporting.  But whether you actually owe tax or not, never fail to file the return on time! Texas along with some other states offer a discount if you file on time, which means you get to keep some of the tax you collect.

If you happen to be one of those people who is always running late or behind, I strongly urge you to get help in filing your returns on time.  Persistent late filers pay more in taxes, penalties, and get audited more often.

In Texas, an auditor will look at all aspects of your state reporting including your Franchise tax filings, unpaid use taxes on those purchases you made out of state and even taxes on services YOU purchased from vendors who did not collect taxes like they were supposed to.

Keep it clean so you can avoid nasty surprises.



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