Consider this a Sales Tax PSA for business owners and customers…
Admittedly, the sales tax laws in the USA are complex (just like the rest of our tax laws), but there are few key items that will help you make sense of them more easily. I was a sales tax auditor for a brief period after college. Here are a few key take-aways I learned:
1. Most states are destination-based, but some are origin-based.
What does this mean?
Most states charge and collect sales tax based on where the item ultimately ends up. If you are a brick-and-mortar shop this is easy because you just charge customers walking through the door the sales tax for your location. If you are mailing items, you collect and remit sales tax to where you are shipping to (this means you could have to register as a sales tax vendor in all 50 states and also means you will want a really good bookkeeper and/or accountant who knows sales tax laws and can set your books and payment collection system up accordingly).For the states that are origin-based, you simply charge and collect sales tax based on your location. Super simple. IF your state uses one basis and your customer’s uses the other, there are codes that determine which one takes precedence. You (or your bookkeeper/accountant) will have to research it.
2. You MUST remit EVERYTHING you collect.
This is where many businesses get in trouble. You will generally be asked to report your revenue and sales tax on a quarterly basis to begin with. This may be changed to monthly or annually after the first year in business, depending on your actual experience. The worst thing you can do is to have a balance in your sales tax liability account at the end of each reporting period. If you did not collect enough sales tax you will have to pay the difference out of your profits. If you collected too much you have to either pay it all to the State or find out which customer(s) you overcharged and refund them. Make sure you are reviewing your Balance Sheet on a regular basis to ensure this account is being zeroed out every time your sales tax payment is due.
3. Keep good and accurate records.
You may have some customers who are sales tax exempt. Make sure you have them fill out an exemption form and keep it on file. Some forms are blanket and others are for a specific time period or transaction. Make sure you track which you have. If you fail to collect sales tax because the exemption form expired you will be responsible for the amount owed. Whether you choose to ask the customer to reimburse you is up to you.
4. Sales tax audits are a pain, but not too bad.
The auditor will be assigned to your business for a specific amount of time. It could be a half day, full day, or multiple days. You will want to give them a private space and ONLY what they ask for. If they hear or see something that causes them to ask questions they will dig deeper. You can be nice, but do not be too open. And, be forewarned: even if they finish early they will generally not let you know. They are expected to spend a minimum percentage of time outside the office, so they will use your space to work on other audits. Please be understanding.
5. Sales tax auditors rarely look at everything.
While it is your right to have them do a complete audit, generally they will take a sample and extrapolate the results. For example, if they look at 1 month of actual invoices they will find the percentage of inaccuracies and apply it to all 36 months being audited. If you feel the sample period is completely inaccurate you can ask to expand the sample, but if the expanded sample is worse you cannot go back and use the original sample.
6. You can request a refund for overpayments.
Say you purchase something in NYC, but live in Syracuse. You can request a refund for the difference from the State (because NY is destination-based). This is true of most states. Whether it is worth your time to complete and submit the forms is up to you.
For my New York residents: there is also a place on your NYS income tax return to pay sales tax for items you were not charged for (ie: online purchases). If you leave this line item blank, you could be audited indefinitely. If you put a “0” the State cannot go back more than 3 years. Read the fine print in your State’s tax instruction manual.
7. Fun fact: tax evasion is how some very big criminals have been caught and prosecuted.
They could not convict Al Capone for any of his many crimes, but they did eventually convict him for not paying income tax on his illegal earnings.