Collecting Sales Tax
Sales tax is a common point of confusion for all growing businesses. In an effort to inform and support all of our clients, this article outlines the four crucial steps to registering once you start to reach economic nexus thresholds and have a requirement to start collecting sales tax.
What Is Sales Tax?
Sales tax is dictated by each state and is implemented to fund state initiatives, programs, and improvements to schools, roads, and other infrastructure. Sales tax is referred to as a “pass-through” tax because it passes through the business or retailer receiving it and goes directly to the state government for the aforementioned purposes. Each state creates their own rules and requirements around who is required to collect tax, how to calculate tax, what is taxable, and even when to make the tax payments. This creates a lot of confusion for businesses, especially when a business needs to comply and collect sales tax in many states.
All of these complexities result in a complicated landscape for a business to navigate if they want to be sales tax compliant. This is where HOST comes in. We function as a middleman, providing sales tax services that allow you to focus on your business.
There Are 4 Key Steps in Becoming Sales Tax Compliant as an Ecommerce Seller
1. Register
Once a business reaches the nexus threshold in a particular state, either physical or economic, they are required to register for a sales tax license with that state. Nexus laws differ between states. Regardless of if you have a physical location in the state or not, if you sell and ship goods or products into the state or sell digital products or services to customers in the state, you may be required to remit sales tax once a certain revenue amount or transaction count is reached.
During the registration process, a tax return filing frequency is assigned to your business by the state, often determined by your sales volume. HOST offers a registration service that provides your business with the state-assigned filing frequency upon completion. We also create an online account with each state and provide you with your login credentials by state at the completion of the project. Read more about our full-service tax registration support here.
2. Turn on Tax Collections
Once you have successfully registered with the state(s), you will want to begin collecting tax for your sales to customers in each state. To do so you need to enable tax collections on every ecommerce platform or other sales channel your business or businesses utilize. Many online retailers operate several different websites on a variety of platforms including Shopify, Magento, WooCommerce, SquareSpace, Big Cartel, and more. Be sure the date on which you turn on tax collections aligns with the effective date used when submitting the registration.
Important Note: You only need to turn on your tax collections for states you are actually registered and are selling merchandise in. Do not turn on collections for every state if that does not apply.
At this point, it is crucial that you begin collecting sales tax not only for ecommerce purchases, but also for in-person, physical sales. All of this information must be collected and maintained in an organized manner, making bookkeeping an essential element to a business’s overall success. HOST recommends that you account for where you are storing your sales tax funds specifically, apart from your total revenue. Something as simple as setting up a separate bank account to separate the sales tax that you collect from all other funds can drastically reduce the risk of collecting taxes and not remitting them.
3. Prepare to File
Unfortunately, organizing your tax files is not as simple as pulling a report and sending it to the state. Each state requires data to be compiled in a format they determine in order for them to accept it. This can also vary not only by state but also by city, county, etc. within each state where you are required to file sales tax.
This process can become extremely complex, very quickly. To learn more about how HOST can tackle this step with you, read more here.
4. File and Remit Payment
Once you have completed the above steps, it is finally time to file your sales tax returns to each state!
If the process of filing and remitting sales tax returns for each state overwhelms you, you are not alone. At HOST, we understand that many businesses do not have the time or resources to keep up with the constant demands of the sales tax system. This is why we offer sales tax filing plans for businesses of all sizes. With our automated filing and payment system, HOST tackles all of your sales tax returns on your behalf without you needing to manage any confusing tax software. We also provide each client with a monthly filing summary to keep you up to date on everything HOST continues to manage and handle for you.
Learn How HOST Can Help You Reach Your Goals
We know tax registration and ongoing compliance can be daunting. It is our goal to provide each and every customer with the tools and information they need to thrive. Contact us and book a consult today to learn how HOST can help you reach your goals.