Most retail businesses, and even some service businesses, are required to calculate and charge sales tax on all items sold. The rate depends on your state and locality, although some people are lucky enough to live in a state with no sales tax. Some items, such as alcohol and cigarettes, have excise taxes attached as well.
Read on to learn how to charge sales tax and how to report sales tax.
How to determine if you need to be collecting sales tax
Sales tax collection doesn’t need to be difficult. Here’s some information on how to proceed.
1. Hope you live in a state that doesn’t have sales tax
Currently, five states do not charge sales tax: Alaska, Montana, Oregon, Delaware, and New Hampshire. Unfortunately, you can’t stop there. No state-level sales tax doesn’t necessarily mean there won’t be county or city sales taxes.
2. Go to your state’s sales tax website
If you don’t live in one of those five states, the next step is easier than you might think. Just search for your state’s sales tax website. Each state has its own sales tax rate and form.
As you go through your state’s site, try to find a fact sheet or user guide for what goods and services have to include sales tax. Not all businesses will need to pay sales tax.
For example, as controller for a construction company, I rarely have to process any sales tax. Not collecting taxes doesn’t mean you don’t have to report them, however. The state of Utah requires me to file a blank sales and use tax return once per quarter showing $0 owed.
Set up your sales and use tax account on your state’s website and make sure to save all of the documentation it spits out at the end.
If you have an online business, you may need to collect e-commerce sales tax in every state that you do sales. Luckily, you probably won’t need to until you sell a substantial amount.
Every time you sell in a new state, make a point to spend 10 to 15 minutes doing research on what threshold would cause you to set up a new sales tax account. It’s worth the time spent to know when you should be paying state sales tax on items sold online.
3. Research local websites
If you’re lucky, the state sales tax website will have a page with information and links to all local sales tax websites where you can find information and set up another account. If not, just search for your county and city plus sales tax.
The locality and state where you have to pay sales tax is based on your “tax nexus.” Traditionally, the tax nexus was just wherever you were located geographically, but the influx of online businesses has changed the rules in many places, so make sure to figure out if you cross the threshold to have a tax nexus in each locality.
4. Research excise taxes
For some states, a plain old sales tax isn’t enough. They also tack on an excise tax for certain items. Some excise taxes are for things that are thought to be sinful or immoral, like alcohol and cigarettes, or even items of a prurient nature. Then again, some states charge excise taxes on fuel and real estate, so there is no rule of thumb to go on. You’ll just have to find your state’s excise tax webpage.
Just like the blank sales tax return that I file for Utah, I have to file a blank excise tax return for the state of Washington each quarter. Put together a tax preparation checklist for each locality that you follow anytime you start doing new business there or need to file quarterly returns. Trust me: Trying to remember every single form you have to file is the road to painful fines.
How to collect, report, and pay your business sales tax
Once you’ve determined that you do need to pay sales tax and have set up your online account, follow these steps to collect and report sales tax each quarter.
1. Set up your point-of-sale system
The key will be collecting sales tax automatically. Your point-of-sale system should calculate your state and local sales tax and add it to every purchase if you run a traditional retail business. These numbers are then imported into your accounting software.
2. Record the liability
With each sale, you’ll collect sales tax and record a liability for the sales tax owed. The journal entry should look something like this:
|Sales Tax Payable||$8|
When you report and pay sales tax each quarter, that liability will go away. But because of the timing of quarterly reporting, you probably won’t see sales tax payable at a $0 balance until you close the account at the end of the year.
3. Calculate use tax
A common question about sales tax is, “If I have to pay sales tax, do I have to charge it?” The answer is no, but the real question should be, “What do I do if my state charges sales tax, but the vendor didn’t charge me?”
The answer is you pay use tax. If you buy goods in a different locality that either has no sales tax or exempts those goods from sales tax, you still need to pay use tax on them. Use tax was created to discourage people from simply crossing a border to buy goods where there is no sales tax and then coming back and using them in their original tax nexus.
Most states require use tax to be paid along with sales tax, so make sure to track it during the quarter so that you can report them together.
4. Report sales and use tax
It’s time to clear out your liabilities and pay some more small business taxes. There are a few ways to figure out how much sales tax you owe. If your state’s website just has you report the total amount, you could report whatever is in the sales tax payable account at the end of the quarter.
If your state wants you to break it down more, use your accounting software to complete the return. Most accounting software will have sales tax reports already made.
Here’s what the journal entry will look like after you make the payment.
|Use Tax Expense||$500|
|Sales Tax Payable||$8,000|
5. Work on excise taxes
The final step is to report your excise taxes. If you spend some time (and possibly some money) to get an accounting software report created that can show your total excise taxes each quarter, you’ll save a ton of time. No one wants to dig through hundreds of invoices to try to figure out which sales included cigarettes.
The sales tax man cometh
Many state tax forms and processes can be a pain to set up and pay, but they don’t have to be hard to track. Take the time to research and learn what your state’s processes are, and don’t be afraid to call and ask questions. When your money is on the line, it’s worth the time.