If you’re like most small business owners, then reporting on sales tax has likely thrown you into a fit of rage at one time or another.
We’re not surprised. Accurately calculating sales tax can be an incredibly complex process. What’s worse, making a mistake like failing to file or not paying your taxes on time can have serious financial (and sometimes legal) consequences.
To make matters worse, every state and some localities within states have their own tax requirements. In total, there are 45 states and thousands of smaller regions (think cities or counties) in the U.S. that charge sales tax. Each one is different regarding the amount you need to collect when you need to file and the kind of records you need to keep.
It’s enough to make you rethink why you ever decided to start a business in the first place. But never fear. In this article, we’ll attempt to demystify the issue and show you how to pay sales tax for small business.
Let’s jump in.
What is Sales Tax?
Before we get started, let’s make sure we’re all on the same page. According to Investopedia, “a sales tax is a consumption tax imposed by the government on the sale of goods and services. A conventional sales tax is levied at the point of sale, collected by the business and passed on to the government.”
You are liable for paying sales taxes to any locality (that collects a sales tax) in which your business has a tax nexus. Nexus is a fancy word that basically means presence. Depending on the regulations of the locality, this could be a physical presence like a store or office, an employee, an affiliate, or some other existence. If your business has a nexus in different localities, this can get complicated fast. In those situations, we recommend working with a tax professional or tax software to help nail down your particular case.
It’s important to note that unlike other nations, in the U.S., there is no federal sales tax, so everything is collected at the state and local level. Candidly, this is why the process is complicated. In many cases, it isn’t as simple as raising one state sales tax. Your business might also need to collect tax at the local level, typically for a city or county, and sometimes for both.
Let me explain. If a merchant is located in New York City, the total sales tax they must collect is 8.875%. However, that total rate is comprised of three smaller rates:
- New York City local use and tax rate – 4.5%
- New York State sales and use tax rate – 4%
- Metropolitan Commuter Transportation District surcharge – .375%
Remember, the above is just an example. As we’ve said before, every state and locality is different. You will need to work with the tax authorities in your state and locality to identify the tax rate your business must collect.
How Do I Get Started Collecting Sales Tax?
In this section, we will walk you through the significant steps required to collect and pay sales tax for your small business.
Get Your Sales Tax Permit
In most cases, the first thing you will want to do is go to your state’s Department of Revenue or taxing agency website and register for your sales tax permit. This document is what legally allows you to collect, report on, and pay sales tax in your state and other localities. You must complete this step before you begin doing business within a state.
To complete this process, you will also need your Federal Employer Identification Number, as well as other essential information about your business and its owners. Save yourself some time by confirming and gathering the information you’ll need to get your sales tax permit before beginning the application process.
Figure Out Your Sales Tax Rate
The next step is to determine the actual tax rate that your business will need to collect from customers. You should also be able to get this information from your state’s Department of Revenue or tax agency. It’s important to note that these rates frequently change, so it’s something you will need to stay on top of. Otherwise, you risk collecting too little or too much sales tax, which will cause you issues down the line.
If your business has a physical presence in multiple states and localities, you will almost certainly need to collect sales tax for each. Again, if you’re in this kind of situation, you want to work with a tax professional or accounting software like QuickBooks at the very least. Doing so will make your life a lot easier.
Determine Which Products Are Taxable
There’s a good chance that not all of the products your business sells are taxable, nor are all likely taxed at the same rate. Additionally, and this varies state by state, but many times, items “necessary for survival” are not taxed or have different tax rules than standard purchases. Items necessary for survival typically include groceries, prescription drugs, and in some states, clothing. Again, be sure to check the rules for your state, as there’s likely some nuance to this. Many times these items are simply taxed at a lower rate, or only items below a specific value are untaxed.
If you sell to resellers, those sales are also often exempt from taxes. However, you will need to ensure that the customer has a valid reseller certificate or license. You’ll also need to keep accurate records of these transactions, including photocopies of all reseller certificates, to protect yourself in the event of an audit.
Start Collecting Sales Tax
Once your business is set up with your Department of Revenue or tax authority, you’re ready to begin collecting sales tax. You’ll want to confirm that your cash register, POS, and/or other systems are set up with the appropriate tax rate(s). Most states also require that you show customers the tax amount they’re paying on a separate line of the receipt. Because this is so common, most registers and POS systems come configured to do this out of the box, but you’ll want to confirm this is working by running a few test transactions.
To help with reporting, and paying sales tax, it’s recommended that you maintain a separate bank account for the taxes you’ve collected. Doing so will help you keep track of the amount of money you owe to the government. It also put a control in place that will ensure sales tax money isn’t accidentally used to pay another business expense. It also helps prevent theft, particularly if you limit access to the account.
Keeping Records and Reporting Sales Tax
Most states will require that your business has some form of record keeping in place, whether physical or digital. These records should keep track of every sales transaction, and note essential information like the amount of the sale, as well as the amount of sales tax you collected. Depending on the recordkeeping requirements of your state or locality, you may also be required to keep original copies of receipts, cash register tape, or other original sales documents.
While these requirements might seem stringent, they will help you with another common obligation: reporting on taxes. Many states require that you periodically report on the sales tax you’ve collected, in addition to actually paying that tax to the state and/or locality. Luckily, detailed records can streamline this process and prevent the likelihood of an error or discrepancy.
Paying Sales Tax
The last piece of the puzzle is submitting a return and paying your sales taxes. In many states, you need to pay quarterly at a minimum, but if you transact at a high enough volume, you may be required to pay on a monthly basis. Just like your personal income taxes, it’s essential that you file and make payments on time to avoid penalties.
How Sales Tax Works with ShopKeep
Now that you understand the basics of how sales tax, works let’s review how you would set up and pay sales tax with ShopKeep.
Set Up Your Tax Rate
The first thing you’ll want to do after figuring out your sales tax rate is entered it into ShopKeep as your default rate. It’s a quick and easy process that takes only seconds. Do you have to charge tax at different rates for different items? No problem! You can create different tax groups and assign one to each of your items. Compared to manual bookkeeping or using a cash register, this makes collecting sales tax much easier for the business owner, especially when you need to charge tax at different rates.
Organize Your Products into Tax Groups
Now that you’ve added your default tax rate, and created additional tax groups if you need to charge different rates for different items, the next thing you’ll want to do is add items to the appropriate tax group. This ensures that the correct tax rate is applied when a cashier adds an item to an order, preventing any errors. If you’re working through this process for a large number of items, you can also assign them in bulk via a CSV file.
Once your items are correctly assigned, you can rest easy. The sales tax you have selected for each item is automatically applied to each sale of that item, with no additional work on your part.
Reporting on Sales Tax with ShopKeep
To make your life easier, ShopKeep now includes a Sales by Tax Group Report. This report makes it easy to see total taxable sales, non-taxable sales, an estimate of sales tax due, and a breakdown of estimated taxes by Tax Group for your business over any timeframe.
Instead of the business owner having to manually calculate this information for your reporting and returns, you now have it available in an instant. This makes it much easier to estimate tax. If you need more granularity, you can filter the report by date range, or by tax group to get to the data you want to see. You can also export it as a CSV file for further analysis with spreadsheet software.
It’s important to keep in mind that, regardless of which software or other methods you use to keep track of your tax collected and tax due, at the end of the day you’re responsible for paying tax based on your taxable sales and the rate(s) set by your tax authority. It’s common for the amount of sales tax you’ve collected to be a little more or less than what you calculate based on your total taxable sales. This is not an error, but merely an artifact of rounding differences between adding up a tax on individual transactions and calculating from your total for the month, year, or quarter.
Finally, please note that this report is only as accurate as the rates you have configured in the Tax Group settings in BackOffice. Tax rates change frequently, and we recommend that you verify the values before filing any tax with your tax authority.
How Sales Tax is Calculated in ShopKeep
To help you better understand this report, we also wanted to give you some insight into how sales tax is calculated in ShopKeep.
ShopKeep calculates sales tax at the item level and then rounds that amount to two decimal places. Based on extensive research, we are confident that this is the most accurate way to calculate taxes for our merchants. To learn more, check out this article that we put together on item-level vs. transaction-level tax.
It’s worth noting that ShopKeep also integrates with QuickBooks. This integration can help you with sales tax reporting as well, especially if you have multiple locations across several different localities, resulting in different tax rates for each.
Summing it Up
There you have it, everything you need to know about how to collect, report and pay sales tax as a small business owner. Plus, now you understand the efficiency and accuracy that leveraging a POS system like ShopKeep can add to your business, especially when it’s time to collect and pay your sales tax.