Quarterly Sales Tax Analysis
Businesses, whether based on an online interface or brick-and-mortar store, are subject to the laws and regulations surrounding Sales Tax. As an online seller, it is your responsibility to determine whether or not you need to collect this sales tax depending on the location where you operate. Most states in the US enforce sales tax collection, except for a few states like Alaska and Oregon.
In some jurisdictions, even local municipalities and districts can enforce their own additional sales taxes on top of state-mandated ones. Business owners who decide to base in a particular area must research the state’s tax regulations and how they can stay compliant with them.
General Rules Regarding Sales Tax
In general, the law states a set of criteria to determine whether or not an online seller needs to collect sales tax through the internet. The general requirements for this tend to include that your business has:
a.) a sales tax nexus located in the area of your customer and
b.) a product that is deemed taxable within the state you are selling it in.
The Wayfair Decision
Before all of these regulations regarding the sales tax nexus, it was based on physicality. Online retailers, not having an actual location in-state, would not have a tax nexus and were not required to remit taxes. With this system, the customer was responsible for reporting and remitting taxes. With the issues that in-state businesses were experiencing due to out-of-state sellers not having to pay the same sales tax as them, South Dakota was first to amend their sales tax regulations in response to the rise of online sellers.
The Wayfair decision made by South Dakota made it so that sellers, whether online or not, that had more than $100,000 of sales within a state had to collect and remit a specified amount of sales tax. Wayfair, an online retailer, challenged this and was defeated in court because the current sales tax laws were outdated in responding to the rising online marketplace. This decision is why many states are now amending their tax laws to encompass online businesses within their tax laws.
The Concept Of A Sales Tax Nexus
A Sales Tax Nexus is a term that encompasses any significant connection that your business has to a particular state. These can take the form of either a physical nexus or an economic nexus, with the presence of either one triggering the sales tax requirement. Before the Wayfair decision, state officials could only enforce tax collection if the business had a physical presence within the state. Common examples of a Physical Nexus include office spaces, brick-and-mortar retail stores, and warehouses owned under your business.
The main difference between these two types of sales tax nexus is that an economic nexus is based on a business’ economic activities within said state. A state may have different interpretations on what activities create an economic nexus. Examples of these may include crossing a threshold of dollar sales or a certain number of transactions made within the state.
Let’s say that you have made substantial states in New Jersey. Your business may have an economic nexus there if the revenue from sales in-state has surpassed $100,000 or if you’ve made more than 200 transactions to customers in New Jersey.
Understanding what business activities create a sales tax nexus is beneficial in saving you thousands of dollars in tax expenditures. Some activities that can cause your business to establish a sales tax nexus in another state include:
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- “Drop Shipping”, where your business is sending products to an online company that is based in another state for distribution to buyers located there.
- Storing inventory within another state, whether or not you have personnel or a physical place of business there.
- Affiliations with advertisers within a specific state in exchange for profit can also create a sales tax nexus there
- Exceeding a specific state-mandated amount of dollar sales
The Taxability of Your Product within a State
Most products deemed as tangible personal property are taxable under state law, with some exemptions made for specific products. For example, in Iowa, there are items in Advertising that are exempt from taxation such as Envelopers and Promotional Materials. They also exempt ATVs used in the agricultural sector.
This is but one example of how each state has different decisions on what items are taxable or not. Make sure that you check state regulations on what items are taxable or not, whether it be inside of your home state or another state you are selling products in.
Calculating the amount owed for Quarterly Sales Tax
Once you apply for a sales tax account number, businesses must remit these taxes every quarter. States usually have the option of filing a tax return on paper, but some states are now pivoting towards an online form. Should you opt to do the computations yourself, you’ll need to know how to compute your taxable sales along with the state’s tax rate.
Firstly, you must note the total sales within the quarter you are paying. This is a requirement for state tax agencies, even with tax-exempted products. You will also have to add the total amount of cash refunds returned to customers. Any transactions and sales made to tax-exempted organizations must also be tracked and recorded on the sales tax form. After subtracting the total amount refunded to customers from the gross sales within the said quarter, the result will be the number of taxable sales to be paid.
Sales Tax Rate
The sales tax rate varies from state to state, with local governments sometimes authorized to collect local taxes. Once you figure out what the sales tax rate is within a specific state, multiply it with the taxable sales that you computed. It will be the amount you owe for the tax period.
However, some states authorize their local governments to administer local sales tax. These taxes are meant to diversify a local area’s revenue sources, as well as to reduce their reliance on the state. Business owners may be affected more as it increases sales tax. If you are in a state with local option sales tax imposed, add the amount stipulated to the state sales tax computation. Below, we’ve put an example where your business pays sales tax in a state that authorizes local sales taxes.
For example, let’s say that you have about $120,000 in taxable sales within West Virginia which has a sales tax rate of 6%. After multiplying both values together, you will come out with a sales tax amount of $7,200.
Sales Tax Amount=Taxable Sales*Sales Tax Rate
However, let’s add in the fact that they allow local governments to charge a 1% local option sales tax. The computation then changes to:
Sales Tax Amount=Taxable Sales*(Sales Tax Rate+Local Option Sales Tax)
Professional Quarterly Sales Tax Analysis and Planning: How It Helps
Knowing where and when to pay your sales taxes is beneficial for all eCommerce owners, but smaller business owners may get confused with this once operations grow. Especially when dealing with selling products within multiple states, entrepreneurs might find that they spend more and more time filling out their tax returns and organizing their tax records.
This is where you can employ a professional CPA firm specializing in tax analysis and planning. Their staff has the necessary knowledge of the tax code to help your business stay tax compliant. Not only that, they usually have the experience to help you get the most back from tax returns and reduce the amount of tax owed.
Aids in Navigating State Sales Tax Laws
With the complications inherent to collecting sales tax in multiple states, business owners might find it more time-consuming to deal with it themselves. Especially with how the Covid pandemic has affected government funds, entrepreneurs all over can expect more initiatives for tax collection. A Tax Professional or CPA Accounting firm will have clients scattered throughout multiple states. The more clients they have, the more they are exposed to different tax regulations. They will also know of certain benefits and reductions that your business may be able to take advantage of to save a few dollars here and there.
Protection from Audits or previous mistakes on a tax return
The complication of tax regulations and laws means that just about anyone can make a mistake or two when filing tax returns. If you are aware of an error and the tax agency responsible for you has not notified you yet, it may be possible to amend it if you contact them immediately.
Avoiding these mistakes is but one of the advantages that a CPA firm can bring to your business, but what if you are already being charged by the IRS? Being able to consult a CPA firm is a massive boon to your side as their tax professionals will be able to check whether or not their assessments are correct. They will also aid your business in responding to the tax agency’s requests.
Overall Savings in both Time and Money
Hiring a CPA firm to handle your taxes can help a business that’s in the middle of a rapid period of growth. Imagine dealing with an ever-increasing amount of orders while performing bookkeeping, accounting, and tax planning all by yourself. A professional can help you reduce spending on unnecessary taxes.They free your time for other business matters, as well as aid in quarterly sales tax analysis.
As the firm you employed comes to understand your situation, they can cater their services to benefit your business as much as they can. It extends beyond tax season as they can also dispense advice on business operations and provide you with the relevant information to aid you in decision-making. A good CPA firm will help you increase savings, but a great CPA firm will act as a CFO and help you grow your business outward.