Retailers understand the difficulty of managing sales tax. Because sales tax rules and regulations change from year to year – 46 states made changes in 2021 – sales tax compliance is a moving target. Keeping on top of things is a full-time job. That’s why we’ve put together the six steps to sales tax compliance for retailers, giving you the tools necessary to be compliant in 2022. This article serves as a solid introduction to compliance, but for a more detailed look, you can download the full guide at TaxJar’s site.
1. Determine where you have sales tax nexus and are required to collect sales tax.
Retailers must collect sales tax from buyers in states where they have nexus. There are two different types of nexus: physical and economic. Physical nexus means you have employees, offices, stores, warehouses, or even servers in a state. Even if your business doesn’t have physical nexus, you may have economic nexus. The laws vary from state-to-state, but it often means if you generate more than $100,000 in sales (or complete a certain number of transactions) in that state, you must collect sales tax.
If you sell your products through a marketplace facilitator like Amazon, they may be collecting and remitting sales tax on your behalf. But you may still be liable for collecting on sales from a brick and mortar location or through your online store. Because the nexus laws are different in every state, it helps to consult a sales tax expert to determine where you have nexus.
2. Verify if your products are taxable
Most “tangible personal property” is taxable – anything from furniture to clothing. But some items – clothing included – are not always taxable in all states. For example, in New York, clothing under $110 is exempt from local sales tax. Grocery items are taxable in Illinois, but at a reduced rate of 1%. You can learn more about why sales tax varies from product to product here. And it’s important to always check on a state-by-state basis to determine if you should collect sales tax on your products.
3. Register for a sales tax permit
When you’ve determined that you have sales tax nexus in a state and that the products you sell are taxable, it’s time to legally collect sales tax by registering for a state sales tax permit. You can register by yourself or hire a professional to register for you. Keep in mind that it’s unlawful to collect sales tax from buyers without a valid permit.
Once you’re given a sales tax permit, the state assigns a sales tax filing frequency and due date. Due dates vary by state, but in most states, tax is due by the 20th day of the month following a taxable period. It can be challenging to track these dates, but TaxJar’s AutoFile can automatically file for you on time, every time.
Should you want to buy items for resale without paying sales tax on those items, you’ll need a resale certificate document to give to a supplier. We’ve outlined the rules for obtaining this resale certificate in multiple states here.
4. Set up sales tax collection on your online shopping carts and marketplaces
After obtaining a valid sales tax permit, it’s time to begin collecting sales tax from your customers. States generally require online sellers to collect sales tax in one of two ways:
- Origin-based sales tax collection
- Destination-based sales tax collection
You can find out if the states you have nexus in are origin- or destination-based here. States with origin-based sales tax sourcing are required to collect sales tax at the seller’s business location, while states with destination-based sales tax sourcing charge sales tax at the buyer’s “ship-to” address. You may also have to charge taxes on shipping, depending on the state.
For drop shippers, sales tax can get complicated. It depends on where the three parties — you, your vendor and your customer — are located and have sales tax nexus. You may be required to charge sales tax to your customer, and your vendor may charge sales tax to you. Learn more about drop shipping here.
5. Report how much sales tax you collected
When you file a state sales tax return, you need to determine how much sales tax you collected from buyers in not only the entire state, but in each county, city and other special taxing districts. In states that have a single statewide sales tax rate, this can be relatively easy. In other states (like California), breaking down each transaction manually is a time-consuming chore, especially if you’re a high volume seller or you sell on multiple channels.
6. File your sales tax returns
Your next step is to file your sales tax returns with the states. Most states allow filing online, and some require it. Here’s how to file manually in every state. We recommend filing at least a few days early to avoid problems with filing and to deal with any state idiosyncrasies. Failing to file on time can often result in fines and interest on the outstanding amount of sales tax owed.
It’s important to file a sales tax return every time you have a filing due, even if you didn’t collect any sales tax over the taxable period. These are called “zero returns.” States consider your sales tax filing to be a “check in.” Sellers who fail to file can be charged penalties or have their sales tax license revoked.
Automate reporting and filing sales tax in order to stay compliant
TaxJar is transforming how retailers manage sales tax compliance. Our cloud-based platform automates the entire sales tax life cycle across all of your sales channels — from calculations and nexus tracking to reporting and filing. With innovative technology and award-winning support, we simplify sales tax compliance so you can grow with ease.
Automating your sales tax through a trusted solution increases efficiency and accuracy, but also allows you to focus on what’s most important: running your business. With TaxJar, you can swap the hours you’d spend navigating multi-state payment processes with automatic monthly reports, on-time filings, and friendly support when you need it the most. Talk to the TaxJar team to learn about how we can ease your sales tax compliance burden.
Contributed by the Editorial Team of Hawke Media Partner TaxJar