Free resource to help you solve your most common corporate sales and use tax challenges.
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 do the job right. In this blog post, I’ll help to demystify the process of filing a sales tax return by covering some of the basic steps. The information below can help ensure that you file your returns correctly the first time and aren’t penalized for making errors. Here are 4 key items you need to know about in order to successfully prepare your sales tax returns.
Most states initially send preprinted tax returns to taxpayers unless the taxpayer has registered for e-file status. These forms are determined and set up by the state based on the company’s initial registration as a taxpayer in that state. 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.
It’s important to remember that if changes have occurred within your business operations that would result in changes to the tax collection, you must communicate these changes to the tax authority in order for accurate returns to be generated. If you use a compliance package which generates the forms, tax data may be misreported or, in some cases, never reported if the correct returns are not established.
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 that is used to consolidate both sales and seller’s use tax for reporting.
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. Many people don’t understand the difference between sales and seller’s use tax. In a state like Missouri, not only does it change the form, but also the rate and the sourcing (which city/county gets the tax). Be aware of potential issues like this when choosing the return form.
Sales tax returns start with reporting gross sales. Determining what amount to put on this 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, gross sales are 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. Again, not putting the deductions on the correct line likely won’t result in an assessment or penalty, but could raise questions under audit. Also, some states use the amounts reported on the deduction lines to value the exemption when evaluating whether to continue to offer the exemption under statute. Deductions can vary by jurisdiction, but some of the standard deductions are:
Once a taxpayer is registered to collect or pay sales and use taxes in a jurisdiction, returns need to be filed on a timely basis. Upon registration, the jurisdiction will let the taxpayer know how frequently they have to file returns and what the due date is. Common frequencies are quarterly and monthly. Companies with very small liabilities may only have to file annually. Companies with very large liabilities may be required to make pre-payments – 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. What this means is that 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 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 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 statutory 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.
In order to substantiate that you have timely filed a return, it is recommended that you use certified mail when sending returns that reflect a significant tax liability.
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 website and input the required data into a web form. In some cases the data can be imported into the web form. A best practice is to incorporate an approval process once the data is entered into the web form.
Note that the due date is generally one day earlier for electronically submitted returns. This is to allow for paper filing if there is 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. It is important to follow the proper process for the filing and payment of the returns.
For more helpful information about sales tax administration, download the Sales Tax Institute’s FREE whitepaper: Important Concepts in Sales Tax Administration. This free whitepaper contains valuable information that can help you understand the keys to successful sales tax registration, compliance and remittance, and much more!
This blog post is also published on Linked In: https://www.linkedin.com/pulse/4-keys-successfully-preparing-sales-tax-return-diane-yetter