If your business sells a product or provides a services that is taxable, and if you are in a "sales tax" state, you will need to set up a process to collect and pay sales taxes and file sales tax returns periodically. This article will walk you through the steps involved in this process. (If your business is selling in Alaska, Delaware, Montana, New Hampshire, or Oregon, no sales tax is charged, so you don't have to worry about this process. Lucky you.) It has been estimated that there are 11,000 tax collection entities in the U.S., so determining and collecting sales tax can be very complex!
- First, go to the website of your state Department of Revenue and register for your sales tax permit. You will first need to have your Federal Employer ID Number and all of the information about your business and its owners. Most states allow online registration, so have all the information ready before you begin the process.
- After you have received your sales tax permit, you can begin collecting sales tax from customers. You must show the tax amount separately, so the customer can see the amount of the tax; this typically isn't a problem, since most sales receipts are programmed to show the amounts. If you are selling online, your "shopping cart" page will show the sales tax calculation. You will need to program the computer for the applicable sales tax amount or amounts.
- If you are selling in multiple locations, you must include the correct sales tax for each location. For example, if you are selling products in several cities or counties within your state, the correct amount must be collected from each locality. This gets complex if you have many places where your products are being sold. If you are selling in several states, you must also program the correct amount for each location within each state.
- What about resellers? These are people who are buying from you to resell to others. For example, if you are selling coffee in bulk, you might sell to a coffee shop. If they have a reseller's permit or resale certificate, you don't have to charge them sales tax.
- After you have collected the sales taxes, you must keep records on how much you have collected (these amounts go into the "Sales Tax Payable" liability account).
- Check with your state to see when you must pay sales taxes. The frequency of payment depends on the volume of your sales. In most states, you must pay monthly if you have a high volume of sales, but at least quarterly in almost every state. Be sure you pay on time to avoid fines and penalties for late payment.
- In addition to paying the state sales taxes you owe, you must also file periodic sales tax reports to your state department of revenue. Most states now give you the ability to pay and report sales taxes online. Take advantage of this feature if you can.
- Some states give a discount for prepayment of sales taxes. This is definitely something to look into, if you can.
- Don't forget that sales tax is determined by the location of the buyer and that local taxes and special district taxes may be added to the state sales tax rate. Check the most up to date state sales tax rates to be sure you are charging the full amount of the tax.
- If someone wants to buy from you and says they are a "reseller" or that they are buying for "resale," they need to show you a valid reseller's permit. Make sure to keep a copy of this permit in case you are questioned by state sales tax agents.
- If you do business in several locations, within and between states, you might want to use a financial software program like QuickBooks to help determine sales taxes for various locations.