We are often approached by newer business owners who may recently have started an e-commerce site or other business and whose sales are ramping up. Sales tax compliance is a topic that comes up quickly in these circumstances. As our company, Miles Consulting, celebrates its 20 years in business this year, it’s always exciting to me to help start-ups envision their dreams.
There are many words you might not often hear if you are not in a tax-related field, but as a new business owner, it is crucial to understand their meanings to ensure sales tax compliance. Today, we are going to look at a couple of these words — “remit” and “collect,” and break down how they differ when it comes to tax compliance. Keep reading to learn how to make certain you are meeting all of your business’s sales tax collecting and remitting obligations.
Sales Tax Process For New Business Owners
First, let’s clarify the steps of the sales tax process. When you think about it from the customer perspective, it seems fairly straightforward. The process is similar state to state as a customer — you are just charged the rate on your purchases as you bring them to the register or check out online. However, as the seller of merchandise (and certain services) there are other areas you need to navigate first. As a new business owner you may not know how sales tax requirements can vary by state. Some major differences include the taxability of the products themselves, the tax rate charged and whether exemptions are available. Another major difference is that some states allow businesses to absorb the tax for their customer, whereas others require the sales tax to be collected specifically from the customer. Close to 20 states allow this absorption, and the rest do not.
What Is The Difference Between Remitting And Collecting Sales Tax?
Collecting sales tax can be complex, especially for a new small-business owner, but this helpful guide may give you a good starting point to make sure you are checking all your boxes. We recommend starting with nexus — determining which states your company has met the threshold to require compliance with sales tax rules. Nexus can relate to either physical presence in a state (your HQ, where you have employees, where you store inventory) or where you have economic nexus. The determination used to be somewhat straightforward, especially as a brick-and-mortar store — you had nexus in a state and would collect the sales tax at your state’s rate. But just about four years ago, the Supreme Court Case of South Dakota v. Wayfair (2018) changed the sales tax landscape and complicated it. Now, every state with sales tax requires companies who meet certain sales thresholds to collect and remit sales tax for them, even if the company had no physical presence in the state.
The next steps to ensure proper compliance include determining whether your product or service is taxable, registering for a sales tax permit, determining the appropriate tax rate and calculating and collecting the tax due during the checkout process, and finally remitting the tax due and filing necessary sales tax returns.
Collecting and remitting therefore refer to two unique steps business owners have to complete to ensure sales tax compliance. Collecting is the process of receiving money from your customers to cover your sales tax obligations, whereas remitting is specifically passing the money on to the state. One very key thing to keep in mind between these two steps is that as the seller and collector of the tax, you essentially become a fiduciary of the state’s money for a short period of time. The seller holds on to the money until a date in time when he/she remits the funds to the state. It’s crucial to remember that those collected sales tax funds must be set aside and not used for other purposes. Those funds must be available by the time the tax return is filed (and sometimes sooner), to satisfy the liability. Again – the seller is just the keeper of the funds for a short period of time. We emphasize this because we have seen cases (many of them, actually) where a seller registers, turns on the collection feature on software and begins collecting sales tax on purchases, but then doesn’t complete the final steps of remitting the tax and filing the supporting tax returns. These types of mistakes in remitting the money to the state can result in substantial penalties and interest if not remedied quickly. If you have any questions, our team of multi-state tax experts is here to help!
Also note that in most states, you only need to remit tax at the state level, but a few, like Louisiana, Colorado and Alabama require you to file at a city or parish level. To complicate the matter more, each state also has its own deadline for when you need to file. If you are doing this on your own, it can be extremely time-consuming and overwhelming.
Do You Need Help With Remitting And Collecting Sales Tax For Your New Business?
Contact Monika Miles, Miles Consulting Tax Team.
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