Free resource to help you solve your most common corporate sales and use tax challenges.
Tax compliance requires proper documentation and communication with the taxing entity. For sales tax, this takes the shape of filing monthly (or quarterly or annually!) returns to the states where you do business.
Properly filing a sales tax return can be a lot trickier than it would first appear.
As with most things that are sales tax related, there are a number of different factors that you need to be aware of in order to get the job done right.
Let’s demystify sales tax return preparation! Dive into four key aspects of the process so you can ensure you file your returns correctly the first time and aren’t penalized for errors.
Most states initially send preprinted tax returns to taxpayers unless the taxpayer has registered for e-file status. These forms and the corresponding tax you are required to remit are determined and set up by the state based on the company’s initial registration as a taxpayer in that state. For e-filers, the return is set up in the state’s system based on the registration information provided.
If you don’t know if you are registered correctly, contact the state to confirm what information they have in your file regarding your type of business and business or inventory locations. These are the most important pieces that determine the correct tax form, for either sales tax or seller’s use tax.
Certain changes within your business operations, like a new store or inventory location, can result in changes for tax collection. You must communicate these changes to the tax authority so the state can generate accurate returns for you. If you use a compliance software package that generates the forms, tax data may be misreported or, in some cases, never reported if you don’t establish the correct returns based on accurate data.
For example, if a Pennsylvania retailer sold merchandise shipped to a location in Pennsylvania, the retailer would remit Pennsylvania taxes using a Sales Tax Return form. This is a return used to consolidate both sales and seller’s use tax for reporting. In this case, the retailer would collect and remit sales tax because the retailer is based in the state as well as the customer.
However, if the Pennsylvania retailer sold merchandise being shipped to Missouri, the retailer would need to collect and remit proper taxes to Missouri using a Seller’s Use Tax return form. If the retailer only registered for Missouri sales tax, it would not have the proper return to submit to Missouri. Seller’s use tax is imposed on sellers located/based outside the state but have nexus and are registered to collect tax in the state.
Many people don’t understand the differences between sales tax and seller’s use tax (or that seller’s use tax exists at all!) In a state like Missouri, not only does the tax type change the form, but also the rate and the sourcing (which city/county gets the tax). Be aware of these potential issues ahead of time so you choose the correct return form.
Sales tax returns start with reporting gross sales. Determining what amount to put on the gross sales line of the return is based not only on what the state indicates but also can be impacted by what data is available to you. Some states feel that gross sales should represent your company-wide gross sales (i.e. everywhere) rather than just gross sales into their jurisdiction.
Generally, most states and taxpayers use the state’s gross sales to be reported within a given jurisdiction. North Carolina, Ohio, and Virginia take this position. However, if there is a sales or distribution office in a given jurisdiction, gross sales is often defined as gross sales by the locations in the jurisdiction. This is the position that Missouri takes. Note that some companies do not have the ability to capture true gross sales or deductions and, therefore, report gross sales as taxable sales. This might not result in an assessment under audit, but it does become a reconciliation issue that could be challenging to support.
Once gross sales are determined, companies are then allowed to claim deductions to calculate taxable sales. These are generally deductions from sales within the jurisdiction. Some states have multiple lines to report deductions while others don’t. Failure to put the deductions on the correct line likely won’t result in an assessment or penalty, but it could raise questions under an audit.
Some states use the amounts companies report on the deduction lines to value the exemption in order to evaluate whether to continue to offer the exemption under state statute. Deductions can vary by jurisdiction, but some of the standard deductions are:
Once you are registered to collect or pay sales and use taxes in a jurisdiction, you must file tax returns on a timely basis. Upon registration, the jurisdiction will let you know how frequently you must file returns and what the due date is. Common frequencies are quarterly and monthly. Companies with very small tax liabilities may only have to file annually. Companies with very large liabilities may be required to make prepayments – sometimes weekly! The due date applies to both filing the return and payment of tax.
Sales tax returns are generally due in the period following the taxable event. For example, tax collected during the month of January needs to be reported and paid in February.
Sales and use tax return due dates vary by jurisdiction, but due dates commonly fall on the 15th, 20th, 25th, and the end of the month. There are a few jurisdictions that have alternate due dates.
Note that the deadlines for filing are defined differently by different states. Some jurisdictions follow a postmark rule – that is, the return is deemed to be timely filed if the postmark on the envelope is on or before the filing deadline (for those still filing via mail).
For other jurisdictions, the return is not considered to be timely filed unless it is actually received by the jurisdiction by the filing deadline. Illinois only requires a postmark by the due date for the return to be considered timely filed, but Ohio specifically states that a return and payment are considered to be filed only when it has been received by the tax commissioner.
To substantiate that you file a return in a timely manner, it is recommended that you use certified mail when sending returns that reflect a significant tax liability. It will help ease any anxieties you have about the return arriving!
Make sure to watch the rules for how the due date is defined for e-filing and payments. The due dates could be tied to the time zone of the tax authority or even be the day before the mailing due date.
Filing returns in paper format is still used by states for some level of taxpayers. Paper filing is typically accepted for taxpayers with low taxable sales and tax liabilities. Each state provides the forms that must be used for returns. Many states allow replicas of their forms to be used in place of state-supplied returns. Note that some states do not permit substitute forms to be used due to technology limitations. If this is the case, submitting a non-approved form could result in interest and penalties for late filing.
Most states now use electronic filing for sales and use tax returns. The most common approach taken by states is web-filing, in which you log onto the state’s department of revenue website and input the required data into a web form. In some cases, you can import your data into the web form. A best practice is to incorporate an approval process once the data is entered into the web form to have another set of eyes on it before you submit.
The due date is generally one day earlier for electronically submitted returns. This is to allow for paper filing if you have a technical error with the electronic submission.
Payments are due on the same date as the return. Again, many states allow or even require electronic payment. If you are required to make payment electronically and send a check, penalties could apply. Pay close attention to each state’s process for the filing and payment of the returns.
Preparing and filing returns is at the heart of your sales tax compliance. It’s critical that you get the process right. After all, it’s something you and your company have to take on on a regular basis.
If your company sets up shop or creates another type of sales tax collection obligation in a new state, be careful and methodical when you set up your return process for that state. Each state has its own rules and you need to be very detail oriented in your approach to each of the four keys (choosing the right form, entering your data, meeting the due date, and filing the return) to prepare your first return correctly.
Any oversight, misunderstanding, or data entry mistake can throw a wrench in the whole return process and create major headaches down the line.