- Sales Tax Remittance Basics: Businesses collect sales tax from customers and remit it to state authorities in the US with sales tax reports, adhering to the state’s filing deadlines to avoid penalties.
- Online Business Considerations: Online businesses must navigate the state-wise variations in compliance thresholds, newer nexus definitions (ex: economic nexus, marketplace nexus), and differing definition of digital goods.
- Avoid Common Mistakes: Misclassifying goods, failure to maintain exemption certificates, incorrect tax calculation, and missing deadlines can lead to costly penalties.
- Leverage Automation: Tools like Commenda simplify tax calculations, collection, and remittance, ensuring timely compliance.
Remit Sales Tax
What does it mean to remit sales tax? How do you remit sales tax? How is it different from collecting sales tax? Understanding sales tax remittance can be confusing. This article walks you through the process of sales tax remittance, highlights common pitfalls, and suggests tools to make compliance effortless, with a special focus on online businesses.
What Does It Mean to Remit Sales Tax to the Government?
Remitting sales tax involves sending the sales tax collected from customers to the state government and filing the required sales tax reports. Businesses with a sales tax nexus and license are legally obligated to remit the full amount of sales tax collected.
Why is it Important to Remit Sales Tax?
Once your business establishes a sales tax nexus, you must register with the tax authority to collect and remit sales tax. It becomes obligatory to collect and remit sales tax thereon.
Non-compliance with sales tax filing deadlines can invite penalties that vary from state to state. For example, in New York, if you willfully fail to collect and remit sales tax, it is considered a criminal offence with a potential jail sentence. Late filing and failure to file are considered civil offences and subject to monetary penalties. These monetary penalties are based on the amount of tax due and are subject to interest on unpaid taxes.
Key Differences Between Collecting and Remitting Sales Tax
Collecting and remitting sales tax are not the same.
Collection
This stage involves collecting sales tax from the customers during the time of purchase. The most important step during collection is determining the relevant combined sales tax amount for each customer and each purchase.
Remittance
This stage involves transferring the collected sales tax amount in full to the state and filing the sales tax reports within the deadlines. The filing deadlines vary from state to state. It is crucial to ensure compliance to the government guidelines during the remittance process.
How to Remit Sales Tax: A Step-by-Step Guide
The process for registration, collection, and remittance to the appropriate tax authority involves a few simple steps as follows.
- Sales Tax Registration
You must register to collect and pay sales tax when a sales tax nexus is established. Sales tax nexus establishes the tax liability of a business to the tax jurisdiction depending on its physical and economic presence. The specific process for sales tax registration may vary from state to state. Common documents required for filing for sales tax license include:
- Social Security Number (SSN) of the business owner
- Employer Identification Number (EIN)
- Details of the founder(s) and the employees
- Determination of Sales Tax Rates and Tax-Exempt Transactions
Now, you must determine the combined sales tax rates applicable in the areas where your business operates. The combined sales tax rates can be arrived at by adding the county/local sales tax rate to the state sales tax rate. You can find information about the sales tax rates on the websites of state and local governments. For tax-exempt transactions, you must maintain proper documentation, in the form of exemption certificates.
- Collection of Sales Tax
Sales tax is calculated as a percentage of the product price. The information on sales tax rates applicable on a product must be made available to your customers. You can use a sales tax software like Commenda to automate sales tax calculation and collection. This helps ensure accurate record-keeping.
- Remittance of Sales Tax
Once the sales tax is collected, it must be remitted to the appropriate tax authority. Remittance of sales tax includes the transfer of sales tax payment to the state and filing detailed sales tax reports. The sales tax reports must provide detailed information of all transactions (exempt or not) in the prescribed format. The filing frequency for sales tax reports and remittance vary from state to state and depend on the size of tax liability. Higher the tax liability, more frequent are the filing deadlines.
Sales Tax Remittance for Online Businesses: Special Considerations
As the nature of business has evolved over the past few years, sales tax rules have changed accordingly as well. As an online business owner, you must stay aware of these factors and how they affect your sales tax remittance.
Economic Nexus
Prior to the South Dakota vs. Wayfair (2018), physical presence was the only factor affecting sales tax liability of businesses. Now, even remote sellers have the liability to collect and remit sales tax if they meet a certain threshold (revenue or number of transactions) in the state where sales are made. You therefore need to determine if you have an economic nexus in the states where you make sales as an online business. If you have an economic nexus, you need to collect and remit sales tax.
Multi-State Tax Requirements
If you make sales across multiple states in the US, you need to determine if you have an economic nexus in each of these states. You must collect and remit sales tax depending on the combined sales tax rate in places where you have an economic nexus.
Treatment of Digital Goods
If you sell digital goods such as software, streaming services, movies, audio, etc., you may or may not be required to collect and remit sales tax depending on the state. Some states like Florida do not levy sales tax on software when sold separately, but levy sales tax when sold along with a tangible property (say, computer). Some states like Texas levy sales tax on standalone sales of software. The definition and taxability of digital goods vary from state to state.
Selling Through a Marketplace Facilitator
If you are an online business selling your products through a third-party marketplace like Amazon, Shopify, and Etsy, you may not be required to collect and remit sales tax in most US states. Here, you are the marketplace seller and the third-party marketplace acts as a marketplace facilitator. The marketplace facilitator collects and remits sales tax on behalf of marketplace sellers for sales made on their platform.
For example, you sell your products through Etsy as well as through a physical outlet in Colorado. You will be required to collect and remit sales tax for sales made through the physical outlet only. Etsy will collect and remit sales tax for sales made through their platform.
Common Mistakes When Remitting Sales tax
Common mistakes business owners commit when collecting and remitting sales tax include:
- Misclassifying product or service: Digital goods are tax-exempt in some states, whereas taxable in other states in the US. Misclassifying a product or service as taxable or tax-exempt creates compliance issues.
- Not maintaining exemption certificates: There is a need to maintain valid exemption certificates for tax-exempt transactions. Failure to provide information about tax-exempt transactions, along with exemption certificates invites penalties from the revenue department of the state concerned.
- Incorrect calculations: Another mistake that business owners commit is the incorrect calculation of sales tax due to the complexity and variation in combined sales tax rates across counties and states.
- Missing sales tax deadlines: Businesses may sell their products in many states in the US. The filing frequency for remitting sales tax and providing sales tax reports vary from state to state. If businesses do not constantly keep track of the different deadlines, they risk missing a deadline and filing late.
These mistakes increase the cost of compliance as sales tax reports might need rework or they can invite monetary penalties from the state government. To avoid making these mistakes and save on the compliance costs, you can use a sales tax automation software like Commenda.
Tools and Software for Sales Tax Remittance
Sales tax software and tools help automate the process of calculating, collecting, and remitting sales tax. These tools offer numerous benefits to businesses such as:
- Error-free sales tax filing
- Time savings from automation of sales tax collection and remittance
- Scalability for multi-state operations
- Seamless integration with Enterprise Resource Planning (ERP) systems
Commenda checks all these boxes and offers tailored sales tax solutions to businesses. We help you manage your tax responsibilities effortlessly, help you stay compliant, and avoid costly mistakes.
Conclusion
Businesses face a legal obligation to collect and remit sales tax to the appropriate tax authority. They must ensure compliance to the sales tax remittance and sales return filing rules across states to avoid penalties. To simplify the task of sales tax compliance, businesses can use reliable tools to automate the process. Commenda helps businesses with automated sales tax calculation and filing with built-in reporting, remittance, and expert accounting support. Book a free demo to consult with Commenda’s experts now!
Citations
- Sales and use tax penalties. (2024, October 16). https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/sales_and_use_tax_penalties.htm#:~:text=10%25%20of%20the%20tax%20due,cannot%20be%20less%20than%20%2450
- Federation of Tax Administrators. (2023b, August 24). FTA members - Federation of Tax Administrators. https://taxadmin.org/fta-members/
- Federation of Tax Administrators. (2024, October 19). State tax forms - Federation of Tax Administrators. https://taxadmin.org/state-tax-forms/
Sales tax information for online sellers | Department of Revenue - Taxation. (n.d.). https://tax.colorado.gov/marketplace-sellers