A Guide to Sales Tax Collection and Filing to Avoid Costly Problems
Owning and running your own company can be tremendously exciting, especially when you start to generate business in new markets and regions. When your business strategy is working like a charm, and customers from other states are beating a path to your door, it’s important to remember administrative obligations that can cause major problems and cost you money if overlooked. One good example is collecting and filing sales taxes.
The majority of business owners who run into trouble with sales taxes never intended to mismanage collection and filing; they just didn’t know the right questions to ask — e.g., when to file, what to file, where to file and how to file. Recognizing the importance of these “when, what, where and how” questions and knowing the answers can help you avoid unnecessary fines and costly assessments. Here are some tips that can help:
- When to file: Different states have different filing deadlines. Cycles can vary by tax jurisdiction, with monthly, quarterly and annual requirements. To make matters more complicated, different jurisdictions set filing deadlines on different days of the month. It’s important to know when the filing deadlines are for each specific jurisdiction.
- What to file: Business owners may be required to collect other levies than sales taxes. Use taxes are collected by companies in some cases, and requirements can vary by tax jurisdiction. Knowing at the point of registration what revenue to collect is essential for proper filing. Improper filing can result in delayed payments and run up costly fines and penalties for the company.
- Where to file: A “nexus” is created when companies operate across more than one tax jurisdiction, resulting in a business presence requiring regulatory compliance in the local district. For instance, a florist in Kansas City, Kansas that also delivers to Kansas City, Missouri may have to file sales taxes in both states. The company may be hit with severe fines if it doesn't file in one state or the other.
- How to file: It’s important to set collected revenue aside for filing and to be specific when completing tax forms. For example, a charitable organization customer may be exempt from sales taxes, but if the business owner classifies the organization as “other” on a form, it can cause unnecessary headaches if a taxing authority asks for documentation. Also, some businesses fall into the trap of collecting sales taxes but failing to put the money into a separate account. Instead, they spend it to pay vendors and meet payroll. That will result in big trouble if they fall short of the revenue needed when it’s time to file sales taxes.
Business owners who fail to understand the when, what, where and how of sales tax filing can experience significant losses of time and money, and possibly even go out of business. Knowing tax requirements and complying in the appropriate manner is critical to business survival.
A proven processing platform that uses the latest information for all tax jurisdictions can significantly streamline administrative processes. That’s why many business owners partner with a sales tax expert, ensuring that critical knowledge and advanced processing technology are always available to ensure accuracy and streamline tasks.
There are many advantages to working with a sales tax partner with an advanced processing engine and broad expertise across tax jurisdictions. One major benefit is the peace of mind that comes with knowing that the partner will be there with documentation and expertise if a taxing authority chooses to audit the business. Whether you decide to go it alone or select a partner to streamline sales tax filing, knowing the when, what, where and how of sales tax filing is essential for your business success.
Jonathan Barsade is the CEO of Exactor, an automated, end-to-end system to calculate sales and uses taxes and file tax returns.