Returns And Sales Tax: What Are Important Things To Know As A Business?

Returns And Sales Tax: What Are Important Things To Know As A Business?

Returns are inevitable when you sell a product, whether you are a brick-and-mortar business, an online retailer or both. According to a recent survey published by the National Retail Federation and Appriss Retail, retailers saw about 16.6% of total merchandise sold eventually returned in 2021, which is up from the 10.6% of total returns in 202o. Since you are bound to see returns as an e-commerce business, it is important to be aware of the sales tax refund obligation process.

It seems simple enough, right? You need to refund your customer the sales tax that you collected from them, so just claim a credit on your next sales tax return. Unfortunately, as with just about every area of sales tax, the answer is a little more complicated. Keep reading this article to learn more about your state’s requirements for refunds and sales tax.

How Many Returns Are We Talking About?

First, let’s discuss the number of returns that happen in the United States. As we mentioned above, about 16.6% of total merchandise sold in 2021 was returned, but if we look at online retail exclusively, about 21% of total items were returned, according to the same survey. In terms of dollar amounts, online sales totaled about $1.050 trillion of total sales last year, with approximately $218 million returned. This can add up to a lot of sales tax. Since the average state sales tax rate is 1.45%, or $3,161,000 in this example, it can add up quickly! The amount of returns can also vary depending on the season. For example, in the 2021 holiday season, November and December, total retail sales reached $887 billion, with an expected return rate of about 18%, higher than the yearly rate. Return rates don’t just vary depending on the time of year, but also on the industry. According to a 2021 study, clothing, shoes and electronics are the top three categories of most commonly returned items, with 88% of those surveyed reporting they have returned a clothing item before. But how do these return rates affect the sellers in terms of sales tax refunds?

Sales Tax And Refund Requirements 

For most states, if you refund sales tax to a customer for a previous taxable period, you are technically obligated to file an amended return for that period. On that amended return is where you would claim the refunded sales tax. Then, the state can add this back as a credit toward a future sales tax payment. The main reason for this is that sales tax rates are constantly changing, sometimes by a lot. For example, if the sales tax rate increases by 1% between the time your customer bought the item and the time that they return it, you would be wrongly credited an extra 1%. This can add up, especially for large businesses. State’s requirements for an amended tax return help avoid this issue.

That said, sometimes companies might still make the decision to take the credit in the period of the return. We recommend our clients look at the materiality. Since there will likely be returns almost every filing period, the former approach would lead to filing amended returns almost every period, which can result in an audit flag.

How To File After A Sales Tax Return 

Now that you know what your sales tax obligations are after a customer makes a return, how do you file the return? Most states allow you to log in to your state’s taxing authority and just amend the previous return online. However, some states do require a physical paper return. If you are unsure what your state’s requirements are, or would like help from a state tax expert, our experienced team at Miles Consulting is happy to assist you.

Documentation Is Key

Whether you’re talking about merchandise returns being recorded in the right period or other adjustments to be made on a sales tax return, it is always important to maintain proper documentation in case of an audit. This is true for all aspects of tax compliance, so we just can’t stress it enough.

Do You Need Help With Your State Sales Tax Compliance?

Sales tax can be complex and varies state to state. Working with an experienced team of state tax consultants like Miles Consulting Group is a great way to ensure you meet all of your sales tax obligations. If you have questions about your tax liability or have any other state sales tax compliance questions, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.

Have a question? Contact Monika Miles, Miles Consulting Team.

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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