How to Navigate Sales Tax Season
January is the “Sales Tax Perfect Storm” because nearly every online seller, no matter how small, will have a sales tax filing due in January.
Why? Larger volume sellers are generally required to file and remit sales tax to their state every month or quarter. But even the lowest-volume sellers—hobby businesses, seasonal businesses, or sellers just starting out—are required to file an annual sales tax return, and this sales tax return is usually due in January.
If you’re new to filing sales tax, this guide will help you navigate the process.
A Sales Tax Refresher
If you haven’t filed sales tax in a year, or you’ve never filed sales tax at all, here’s sales tax in a nutshell.
Forty-five U.S. states and Washington D.C. all have a sales tax. If you sell taxable products (which most products are), you’re required to collect sales tax from buyers in your home state and any other states where you have sales tax nexus.
If you only sell on one sales channel, like eBay, your sales tax collection, reporting and filing is fairly easy. But if you sell on more than one channel, you need to make sure you are collecting the right amount of sales tax from buyers on all of your sales channels and in each of your nexus states.
You’ll need a sales tax permit from your nexus state before collecting sales tax. Once you receive your permit, your state will assign you a sales tax filing frequency (generally monthly, quarterly or annually) and sales tax filing due dates.
How to File Your Sales Tax Return
When you’re ready, here are the steps you need to follow when you file your sales tax return.
1. Double Check Your Sales Tax Filing Due Date(s)
Sales tax is governed at the state level, and that means each state gets to set their own sales tax laws, rules, and guidelines. While a majority of states want sellers to file sales tax returns on the 20th of the month after the taxable period, due dates in many states can vary.
For example, some states want to hear from you on the 15th of the month, some on the last day of the month, and some on various other days.
Check this list of January Sales Tax Due Dates in 2017 to find your state’s sales tax filing due date.
2. Verify Your Sales Tax Filing Frequency
I mentioned before that you might file monthly, quarterly, or annually (or even some other frequency, like semi-annually). But did you know that this frequency is also subject to change?
If your sales volume within a state has risen or fallen over the previous year, the state might change your sales tax filing frequency. The rule of thumb is that the more revenue your business makes in a state, the more often that state wants you to pay sales tax.
Be on the lookout for a letter from your state’s taxing authority updating your sales tax filing frequency around this time of year.
3. File Zero Returns
File a sales tax return even if you didn’t collect a single penny of sales tax. This is sometimes referred to as a “zero return.”
States consider filing a sales tax return to be a “check-in,” and they want to hear from you even if you didn’t make any sales or collect any sales tax over the taxable period.
In some states, like Florida, failing to file a sales tax return can result in a $50 fine. In other states, you won’t be fined, but the state could cancel your sales tax permit.
4. Don’t Discount Sales Tax Discounts
About half the states with a sales tax realize that asking merchants to serve as tax collectors results in a big chore for businesses. So they will allow you to keep a very small percentage of the sales tax you collect, as long as you file and pay your sales tax on time.
The discounted amount is usually just 1-2% of the total sales tax you’ve collected, and it’s generally capped at a certain amount. But a discount is a discount, so don’t forget to take them when they’re available.
For reference, here’s a list of states with sales tax discounts for on-time filers.
Give Your Business a Sales Tax Checkup
January is also an excellent time to give your business an annual sales tax review and double check that you’re collecting and processing sales tax as efficiently as possible.
- Check your nexus states: As you grow and expand your business, you may find that you have sales tax nexus in more states. Nexus is created when you have a “significant presence” such as a location, an employee or contractor, or inventory stored for sale in a state. You can see what every state’s laws have to say about sales tax nexus here.
- Make sure you’re collecting correctly: As you expand your online business you may start selling on other shopping carts and marketplaces. Take the time to double check that you are collecting sales tax in all of your nexus states on all of your current shopping carts and marketplaces.
- Automate sales tax reporting and filing: Let’s face it. While necessary, managing sales tax isn’t a profitable business activity. If you are spending time reporting and filing sales tax when you could be growing your business, it may be time to take advantage of modern technology and automate your sales tax compliance. A sales tax solution can report how much sales tax you’ve collected in a state and automatically file sales tax for you.
TaxJar is a service that makes sales tax reporting and filing simple for more than 7,000 online sellers. Try a 30-day free trial of TaxJar today and eliminate sales tax compliance headaches from your life.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.