All small businesses in the United States must collect and remit sales tax to the city and state in which they are doing business. Typically, this means you must file a monthly or quarterly sales tax form in the state you live in, but if you do business in multiple states, it means you will need to file in all of those states. It can quickly become complicated, especially if you’re a new business owner who isn’t familiar with how sales tax works. Unfortunately, one small mistake with your sales tax can be very costly. In some cases, it could even be costly enough to force you to shut your doors.
The Basics of Sales Tax
Sales tax is defined as being a government-set tax on the sale of any goods and/or services. It’s typically a percentage of the price of the item or service, and it’s normally collected from the buyer at the point of purchase. The business holds this sales tax out from their profits and regularly pays it to their state on the required basis.
It sounds simple enough, but it can get more complicated. You do pay city and, in some cases, county or regional sales tax as well as state sales tax. Fortunately, in the U.S., most states collect all of this tax and split it as needed. You don’t have to pay your city sales tax separately. Unfortunately, while that does make sales tax easier, there are a number of factors that make it more complicated.
What Makes Sales Tax Complicated?
If you have a brick-and-mortar business in one location, sales tax is fairly straightforward. You do have to learn how to calculate it, of course. You’ll need to know your state sales tax amount and any additional amount to add for your city or location. Some cities may pass a temporary sales tax increase to raise funds for a specific project. For example, they may add half a cent to all purchases made within the next 18 years to fund a new city park or to renovate all of the local schools. This sales tax is usually voted on by residents.
How to Pay Your Sales Tax
Once you know how to calculate it, you’ll need to know when to pay and what forms to file. Fortunately, this process has become much easier thanks to the internet. Most states have an online sales tax portal where you can fill out the correct forms, submit them, and make an online payment. You shouldn’t have to mail in any paperwork.
When to pay can be a little more complicated. Some states require businesses to submit a monthly sales tax report. However, if you make below a certain amount or only do sporadic business in the state, you may qualify for quarterly or even yearly filings. This cuts down on the amount of paperwork you have to do.
Note that you always have to file your sales tax report regardless of how much money you made for that period or how much sales tax you owe. Even if you had no income and, therefore, no tax to pay, you still have to file a report that states you had zero sales for the period.
Filing in Multiple States
If you only do business in one state, you will only need to file for that state. However, if you operate businesses in multiple states or often travel to other states for events such as trade shows, you will need to register for a sales tax number in every one of those states. Each state defines what is called a nexus or presence in the state. If the tax regulation determines that you do have a nexus in that state, you will have to pay sales tax there.
This is one area where you may need to consult with a bookkeeping expert to determine where your nexus or nexuses are. Typically, if you sell goods or provide services in a state, you have a nexus there, but it’s not always so cut-and-dry. Online sales have added an entirely new level of complexity to sales tax as well.
Selling to Tax-Exempt Organizations
Another complication you may face is if you provide goods or services to an organization that is classified as tax-exempt. The most common type of exempt business is classified as a 501(c)(3), but there are other exemptions. These businesses are usually nonprofit organizations, and as such, they do not have to pay sales tax. Because states differ in how tax exemption works, you will want to consult with a professional to fully understand how to process and report these sales.
Common Mistakes Small Business Owners Often Make
Many small business owners make simple, yet very costly, sales tax mistakes. The first is simply failing to submit their sales tax paperwork or make a payment. Some new business owners don’t fully understand how to apply for their sales tax number or how to remit the collected taxes. Others may not remember to file or not understand their state’s online filing system. This is especially true if they have no sales to report for a period. Missing a filing may result in a late fee or other fines. If you miss too many filings or make mistakes on multiple filings, you may be audited.
Wrong Tax Amounts
Another common mistake is failing to collect the correct amount of sales tax. You will have to pay the correct amount calculated from your sales whether or not you actually charged your customers the right amount. If you find that you haven’t collected enough sales tax, you will have to make up the difference from your profits. Even if you were off a small percentage, that can add up if you had a large amount of sales.
Submitting the Wrong Tax Payments
If you don’t enter the correct amount of sales, you may not calculate the correct amount of sales tax you owe. This can be very easy to do if you have multiple locations or often sell at trade shows. It’s also possible to submit an incorrect payment, though most online systems have reduced the chance of making this mistake. If you do submit the wrong amount, you will need to amend your return. If you don’t catch this mistake and are later audited, you may be fined or otherwise penalized. You will also have to pay any back taxes you owe.
Math Errors Can Add Up
While less common now, it’s still possible to make a basic math error on some tax forms. By filing online, you may not need to do any calculations at all. If you do, be sure to double-check your figures. Again, submitting an incorrect form means you’ll later need to amend it if you find the error. If you don’t find these errors and are audited, you can still be fined—honest mistakes are not always easily forgiven when it comes to taxes.
In extreme cases, such as constantly filing late tax forms or consistently making errors, the state’s tax commission may be empowered to void your sales tax permit. This means you cannot legally sell goods or services in the state, which is likely to lead to closing your business.
Keep Up with Changing Laws
Tax laws do change, especially at the local level. A new sales tax increase may be voted into effect, an old increase may end, and there may be special events such as tax-free weekends to encourage spending. All of these things affect your business, and you’re going to need to keep up with them. Failing to do so can cost you a good amount of money, especially if you get audited and multiple tax reports are flagged with errors.
Don’t Risk Making Mistakes—Hire a Virtual Bookkeeper
A virtual bookkeeper is a great resource to help you handle your sales tax. These experts understand how sales tax works and keep up with the changing regulations. They will be able to advise you on how to apply for the required sales tax numbers and can handle all of the tax reporting for you.
Virtual bookkeepers have an advantage over local bookkeepers, too, because they have clients across the country. This means they have to know how multiple states handle sales tax. They may even be familiar with international reporting and with handling online sales. If they don’t know something, they know where to go to find the right information.
Working with a virtual bookkeeper means you don’t have to try to figure out sales tax on your own. All you have to do is collect it from your customers. Your bookkeeper will keep track of your sales, how much tax you owe, and can file your sales tax reports for you. You’re free to focus on running your business while they take care of the books.
Protea Financial Offers Bookkeeping and Other Virtual Accounting Services
Protea Financial has years of experience in virtual bookkeeping, payroll, tax compliance, and other accounting tasks. Our team understands the various sales tax regulations across the country, and we’re ready to help you set up to file your taxes. Whether you’re a new business that periodically sells at trade shows in a single state or a small business with locations in a handful of states, we can help. Contact Protea today to discuss your sales tax needs.
Don't Risk Your Business
Your business is not worth the risk. Know what you’re doing, or hire someone who does!