In Sales Tax 101, we covered the what, why and how of sales tax. 201 covers collection and payment.
The first step in is to determine where you have nexus. To begin that process, complete our Nexus Evaluation.
Steps for Collecting and Paying Sales Tax
1. State Sales Tax Registration
Before collecting and paying sales tax, companies have to register with every state where nexus has been determined. The sales tax registration process can be as complex as sales tax payment, with unique state-by-state requirements and fees.
As part of the permitting process, each state will assign deadlines to file and remit tax payments. In most cases, states will collect taxes monthly or quarterly. It’s important to keep this information straight and to manage tax deadlines closely. Additionally, some states do not require renewals while some do, and the timelines for renewals vary.
2. Determine the Right Tax Rate
One of the most complex elements of sales tax is determining the right rate. Online sales tax rate finders are helpful, consolidating information from the state, county and local level to provide rates for addresses across the U.S.
If you’re using a point of sales system or selling through online channels, sales tax automation software can be used to ensure the tax rates being collected during the transaction are correct. Be sure to set these up early to avoid transactions not collecting the right sales tax rate.
3. Set Up a Bank Account for Taxes
One of the easiest ways to ensure businesses are able to comply with sales tax requirements is to separate the revenues generated by sales tax from the revenues generated from the rest of the sale. Many banks will help you set up a tax payment account to make tracking and remitting taxes easier.
4. Track Sales Details
It is important to maintain adequate records of all sales in order to justify your sales tax payments. Records should be saved for at least 3 years:
Copies of any invoices and receipts. Detailed information on these items should include the price for items sold and any sales tax that was collected for these items. Balance your bank account with these records weekly to ensure the money adds up.
Exempt customer information to show the customer was eligible for the exemption. For more information on exemptions, read Sales Tax 301.
Internal audit records. Conducting regular reviews will help you proactively identify issues to confirm you’re paying the right amount of taxes and to avoid audits.
5. File Taxes & Provide Payment
Many states require sales tax payments to be done electronically. If you are required to pay taxes in a state, be sure to follow their specific instructions for filing sales tax forms and completing payment.
Up Next: Sales Tax 301