For small businesses, managing finances is similar to running a tight ship. There is very little room to spend unnecessarily or to not pay bills and taxes on time. There is one very important tax you need to know, and that is the sales tax- for any business, especially one that just started.
Things can get complicated very quickly where taxes are conquered, and when it comes to sales tax preparation services, it can be particularly vexing since sales tax regulations keep changing.
As a business owner, knowing and understanding the basic rules of tax is important. That said, no man is an island, so get the help you need by hiring a full-time or part-time expert to help you sort out your financial stumbling blocks. The objective is to find a comprehensive tax solution that enables you to move forward and focus on your business growth and success while ensuring that all tax issues are in order.
What is a Sales Tax?
A sales tax is to be paid by the end purchaser of goods and services. A sales tax is initiated when a tangible personal property is used or consumed; in other words, a retail sale process has taken place.
A sales tax is often applied to a piece of property that can be seen, measured, weighed, felt, or touched. However, with e-commerce capabilities now, sales taxes also cover transactions over the internet, and it also varies from different states.
How much Sales Taxes to Pay?
How much you need to pay in sales tax depends entirely on the tax rates that are applicable to the total selling price. The legal burden to pay a sales tax lies on the customer, whereas the responsibility to remit this tax to the state is entirely on the merchant’s responsibility.
You can expect to pay sales taxes on almost every type of transaction done in cash. This includes
installment sales, credit sales, layaway sales, as well as sales that involve trade-ins or exchanges of property.
If you do conduct business in different states, it is your responsibility to ensure the kinds of sales taxes needed to be made and what updates have been made on them. This needs to be known on the get-go as a small business owner simply because it helps you understand whatever tax legislation each jurisdiction has.
Getting the Basics of Sales Taxes
1: Find out if you created a sales tax nexus in a new jurisdiction
A sales tax nexus determines the extent of the connection between a taxing jurisdiction (the state) and the entity (your business. Only until this connection has been determined, can the taxing jurisdiction impose sales taxes on your business.
Nexus laws vary according to different states and it is often complex. Reviewing your business footsteps within the last year is important to know whether you need to have nexus in another state. Simply put, you can ask yourself these questions:
- Were there any new hires in your company within the past year?
- Do they work remotely?
- Did your sales rep go to a different state for business?
- Did you deliver or install any product or service in a new state?
If you have answered YES to these questions, that means you will have nexus in a new state. Reviewing the specific nexus in each new state where you do business in is important. Once you have established nexus, you need to check the specific sales tax laws so that you can correctly calculate, file, and remit your sales tax liability.
2: Determine the kinds of returns you need to file electronically
Like the nexus laws, payment options available for businesses also differ according to state. In most cases, businesses with a bigger tax liability can make electronic payments. But it could also be that some jurisdictions do not have the required infrastructure to enable electronic payments. Knowing what payment options and requirements are available for you in your state will save time in making the payments the correct way.
3: Determine if your business is required to make prepayments
Some jurisdictions require prepayments to be made, especially for larger tax amounts, so this is something you need to check on. When it comes to prepayments, be aware that it also involves different filing schedules, sometimes more than once a month, compared to regular returns. Avoid multiple filing schedules and adjust your financial calendar accordingly so that you make the prepayments and remit the appropriate sales tax in the right jurisdictions.
4: Consolidate your sales tax payable account
One of the things you need your finance team (or person) to do is to reconcile the sales tax payable account with your source documents. You can use the formula below:
Identifying the balance on your account at the start of the accounting season + Total Amount of Billed to Customers – Total Sales and Use Tax Paid
Consolidate this amount with the current balance of your sales tax payable account.
Ensure that your finance person reorganizes any rounding balances or discounts to the correct general ledger account.
5: Check on your checks to the DOR
The last thing you want to deal with is an outstanding sales tax balance only because of a misplaced notice from the Department of Revenue or from the bank. Ensure that your finance team reviews the process of receiving, sorting, and document any incoming documents.
6: Update your filing frequencies
Once the holidays are over, the start of the year usually signals a refreshing time to review and update your sales and use tax returns. This will help you to identify when you will need to file your taxes. Usually, the state sends notices to taxpayers a few months prior to inform of any filing frequency change.
7: Understand taxes on any new products
If you have a new product or service from your business, find out what taxability laws apply to it. You need to know any unique laws that each jurisdiction has where you have nexus. This is to enable your business to sell your new products. Keep in mind that what item is taxable in one state could be exempted in another state.
8: Update and Agree with terms of Customer’s Tax Exemption certificate
Updating and reviewing any exemption certificates is important so that you do not continue to charge tax on your customers. You may also need new exemption certificates for your customers in the event you changed your company name or acquired a new company.
9: Check any notifications from jurisdictions
One of the importance of filing, updating, and paying your taxes in good timing is so that you know what and when things have been paid, you don’t overpay, and if a jurisdiction made any processing errors, you have the receipts to show proof. This also includes checking any notifications from your jurisdictions. Failing to respond in good timing may result in a lien to your corporate offices, levy to your bank account, or worse- suspension of your business license.
10: Verifying your zip codes and jurisdictions
An important element incorrectly determining your sales tax rate is knowing where you have liability for collecting sales tax. For this, ZIP codes are among the most accurate ways of determining sales tax rates. ZIP codes are essentially a series of streets and postal routes that a jurisdiction or town planning agency uses, and it is divided and changed according to how the areas become more populated over time.
Using the wrong ZIP code from the wrong jurisdiction or even leaving out a tiny detail in your special district tax may result in unnecessary hassles such as penalties, audits, and return reconciliation.
The number that is shown as the total sales tax rate is actually the accumulation of all the state, county taxes. A jurisdiction is defined by the variety of criteria, and it can differ from one address to the next. You would find that it is not strange to have multiple sales tax rates within the same ZIP code.
Keep in mind that ZIP codes do not determine the tax region that an address belongs to, plus. If you determine based on ZIP codes, you may end up applying incorrect remitting sales taxes and rates and also paying to the wrong jurisdictions.
One way to identify accurately the jurisdiction you are in is to find out the correct location or destination of the transaction using latitude and longitude coordinates.
Putting All your Sales Tax in One Place
Staying organized with your notices, files, bills, and other necessary paperwork and documents is extremely important for businesses, small and big. When you have all your information sorted in one place, you save valuable time. You can work with your finance person to come up with a comprehensive sales tax solution that enables you to easily look up sales tax rates, taxability issues, any due dates as well as the rules that apply to your jurisdiction.