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From permits and labor processes to safety protocols, small businesses must comply with many external and internal regulatory requirements. Among the many rules governing your small business are those overseeing the proper collection and remittance of sales tax.
Like other compliance issues, the regulations and nuances involved can be confusing—even for the savviest business owner and entrepreneur. But it’s important to stay on top since misunderstanding and mismanagement of sales taxes and your obligations can put you at risk for fines and penalties. A sales tax calculator is a good starting point, but much more is involved.
The following strategies can help you get a handle on it so you can tackle your small business sales tax compliance requirements in stride and keep your business growing and strong.
Understand the sales tax nexus.
A sales tax nexus defines the connection or relationship between a taxing jurisdiction, such as a state, and an entity, i.e., your business.
If you operate strictly as a brick-and-mortar business, the state where you have a physical presence determines your nexus. A sales tax calculator can help you estimate your sales tax rates in your state. Remember that total sales tax rates could vary greatly, even by ZIP code, since they encompass sales tax rates plus local sales tax rates, as well as city, county, and district rates.
Are you an online seller, or do you operate across state lines? Things get a bit more complicated. Your sales tax obligations will vary by state—and you’re responsible for collecting sales tax from your customers and clients from each state. It can be complex, but failure to collect applicable sales taxes can put you at risk of legal consequences.
For help navigating the sometimes mysterious world of the sales tax nexus, it is wise to consult with a tax professional.
Know when to file.
If registered to collect or remit sales taxes in a particular jurisdiction, you must file correct sales tax returns—even if your liability is small or zero. While common sales tax return due dates are the 15th, 20th, 25th, and end of the month, dates and rules vary widely by area, and the frequency of filing may be dependent on your average monthly sales. For example, if you have a very small or seasonal business, you may only need to file sales tax annually.
Set up calendar reminders with due dates, and include what jurisdictions consider timely payment, for example, if it is the receipt or postmark date.
Keep comprehensive records
Every state has its recordkeeping requirements, but in many instances, you are advised to keep:
- Sales slips
- Invoices
- Receipts and cash register receipts
- Records of non-cash transactions impacting accounts payable
- Records of cash and check transactions
- Point-of-sale records
In the event of an audit, poor or inaccurate records can put you at risk for penalties, interest, Certificate of Authority suspension, or even criminal prosecution. Prioritizing good recordkeeping can help protect your small business from regulatory scrutiny. An accounting software system with a convenient sales tax and receipt and expense tracker can help you keep tabs on the data regulatory agencies demand.
These trackers connect to e-commerce tools like Amazon, eBay, and Shopify and automatically calculate taxes on your invoices. You’ll minimize the need for manual data entry, have the records you need in the event of an audit, and be able to tap into valuable insights about your profits, payroll, and more at any time.
Automate processes
Keeping track of the sales tax you owe is easier if you do it automatically. This is where an accounting software system can be an invaluable tool.
Depending on the system you select, you may be able to collect sales taxes from invoices and sales receipts automatically. With user-friendly accounting software, you can set up your system to your specifications, and each time you record a sales transaction with the added taxes, your sales tax liability will automatically increase and be added to your sales tax liability account.
Run and review sales tax reports.
Knowing what you owe as you go is not always easy to do. But it’s essential for helping you prepare and ensure accuracy when it comes time to pay your taxes. Reviewing sales tax reports can help you stay on track.
If you use accounting software that automates your sales tax liability, running reports is simple. A robust accounting software system can summarize your collected sales tax and break down what you owe by tax agency and district. You’ll be able to view:
Total taxable sales – The total amount of taxable sales you’ve collected.
Total nontaxable sales – Total amount of nontaxable sales you’ve collected.
Tax rate – The rate you must pay your specific tax agency and district.
Sales tax payable as of – The total tax collected minus the tax payment you’ve made during the period.
Tax collected – Your total taxable sales multiplied by your tax rate.
Sales tax compliance peace of mind
Sales taxes can be complicated and confusing, no matter what type of business you run. Among the many things you need to know are:
- Sales tax nexus requirements
- What products are taxable based on jurisdiction
- When should you charge sales tax? Some states don’t require it.
No doubt it’s a lot, especially when you have many other pressing business responsibilities. While you should look to your accountant for expert guidance, basic sales tax knowledge and valuable sales tax tracking and reporting tools, such as accounting software, can help with compliance so you can keep focusing on growing your business.
