Sales Tax Compliance

The Sales Tax Process (Registration through to Returns)

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Sales tax obligations apply to all sellers, regardless of business size - or business model. Therefore, whether your business is large or small, and whether you operate from a bricks-and-mortar location - or through an on-line shopping cart - you must follow the same sales tax rules. Additionally, sales tax rules apply regardless of order method; whether an order is received in person, called in by phone (or mailed or faxed) or electronically submitted through an e-commerce shopping cart. (See also Internet Taxation section.)

Sales tax compliance can include the following activities:

Registration: Any seller (or retailer) making regular sales of taxable property is required to register to collect sales tax in any state in which they maintain a substantial "physical presence" - also referred to as nexus. (See also Nexus section for clarification of nexus issues discussed in this section). In some states it can be a criminal offense to operate without being registered (which depending on state can include a seller's permit, license or certificate of registration) and for that reason it is important to register prior to making your first sale in a jurisdiction. It is also important to be aware that some states have local jurisdictions which may have their own sales tax requirements - and may require separate registration and compliance activities.

Collection: If the seller/retailer makes a sale into a state in which they are registered, they are required to collect sales tax on any taxable sale delivered to that state unless a valid exemption is applied, applicable to the purchasing entity or the nature of goods. (See also Exemptions section). This process can be complicated by the fact that the taxability of goods or services can vary by type, as well as by jurisdiction. (See also Taxability section). Some states offer useful bracket schedules to show how much tax should be calculated. Additionally, a variety of computerized solutions are available to ease the sales tax compliance process. For information visit the Sales Tax Institute's Sales Tax Rates page.

Reporting & Remittance: Reporting requirements can vary by state. However, states will generally provide you with reporting and remittance instructions at the time of registration. Once registered to collect sales tax in a state, taxpayers generally are required to file tax returns on the frequency defined by that state. Reporting may also be necessary even if no liability exists for the period. In such situations, a zero tax due return may be required. Regardless of your business size - it is imperative that you maintain accurate books and records regarding your sales tax liabilities - and maintain that information for the period of time as required by each state. Given the complexity of sales tax law (and the associated risks and penalties). it is important that you understand your compliance obligations and when necessary seek the assistance of an experienced tax professional.

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In Sales Tax States - All Orders Have Either Sales or Use Tax Due:

If the business does not have nexus in the state and does not collect the sales tax, the item may still be taxable. It is the purchaser's legal obligation to remit the use tax directly to the state where they are using the item if it is taxable. However, just because the customer may have the ultimate liability for the tax in these situations, it does NOT relieve retailers from their legal obligation to collect the tax when and where they have nexus.

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Determining Your Sales Tax Obligations - In Your State:

If you are shipping to the state where you are located, you are required to collect sales tax on the full sales value of any taxable order (whether the customer is in your state or elsewhere) unless a customer from another state can provide you with valid exemption documentation for your state.

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Determining Your Sales Tax Obligations - In Other States:

If you sell and ship taxable goods or services to customers located in other states that impose a general sales tax, then you must determine whether you have established nexus in that state. If you are deemed to have nexus, then you are required to collect that state's tax on all taxable transactions into that state. If however, an out-of-state customer comes to your state location, to pick up the goods, you would charge your state's sales tax.

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Resale and Drop-Ship Transactions:

If your customer is reselling the items you are selling to them, then they will need to provide an acceptable resale (exemption) certificate in order to purchase the items without tax. (See also Exemptions section.)

Drop ship transactions (see also Drop Shipment section) can also be considered purchases for resale (and therefore exempt from sales tax) - although this is NOT always the case. If the product supplier/shipper is shipping the order directly to a state in which they are not registered (and/or do not have nexus), then the supplier/shipper does not have an obligation to collect sales tax for that state. However, as often happens, drop ship taxation becomes complicated when the supplier/shipper is registered in the ship-to state - but the retailer is not. In such cases, the supplier/shipper is obligated to collect tax from the retailer on the drop ship transaction unless the retailer can provide valid drop-ship exemption documentation (which varies by state). This is an issue which both retailers and suppliers/shippers need to consider.

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Sales with Multiple Addresses and/or Parties:

When multiple addresses are involved in a transaction, there can be some confusion as to which state sales tax to charge - also referred to as the sourcing of the sale. Generally, sourcing is determined by where the transfer of possession from the seller to the customer (or the customer's agent) occurs. This is generally the state in which the ship-to (or delivery) address is located. If another address is listed (i.e. for purchase order or for billing/ invoicing purposes) it is not relevant unless there is a situation where no other physical address is available. When the sale occurs within a single state (the ship from and the ship to are in the same state), the sourcing for local taxes needs to be determined. Most states follow destination sourcing - the tax rate to use is the ship to location. However, some states follow "origin" sourcing rules. This means that the tax rate that applies on instate sales is the seller's location or ship from (or order acceptance) location.

Therefore, if the item is shipped to the customer, tax applies for the delivery state. However, the seller should only collect that tax if they are registered to collect tax in that state. Alternately, if the customer picks up the item at the seller's location, tax should instead be collected for the seller's state, unless the purchaser can provide a valid resale or exemption certificate for the seller's state.

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Sales Tax Liability Risks:

When you collect sales tax and fail to remit it (or remit in incorrectly), this can be considered fraud and subject to substantial penalties (and even imprisonment). If you determine that you have a prior period liability, most states offer the opportunity to enter into settlement agreements which are typically referred to as Voluntary Disclosure Agreements (VDA's). It is recommended that a third party (such as an experienced accountant, consultant or lawyer) assist with at least the initial approach to negotiate the terms. States also periodically offer Amnesty programs where taxpayers can resolve any prior period liabilities. For a list of all current, future and some past amnesty programs visit the Sales Tax Institute Amnesty page.

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Compliance Assistance and Other Resources:

If you require assistance regarding sales tax issues, YETTER is available to provide a broad range of services. Please call Diane Yetter at 312-701-1800 to discuss your requirements. The Sales Tax Institute also offers classes which review sales tax basics - through to advanced issues and best practices. Register for the Sales Tax Institute Online Course ("Introduction, Definitions and Nexus") to learn more about this challenging topic.

Are you a multi-state company with a SALES TAX COMPLIANCE question that we have not yet covered here - or in our Sales Tax Archives (below)? If so - Submit it here.

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Sales Tax Questions - Compliance

Don't forget to use drop-down to view all "Compliance" sections (Basics, Controversies, Issues and Order Sourcing) - or other topics.

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Question/Topic  Date 
To meet Minority Business Entity (MBE) contacting requirements we buy waterline pipe from a wholesaler but we pay a certified MBE for the pipe plus a 1% markup fee for the cost from the wholesaler ...2014-03-15
We have nexus in 15 states with independent reps making sales calls there, etc. We have begun obtaining sales tax licenses in each nexus state. Someone told us we also have to have an "agent" or ...2013-02-25
We have a customer who has a branch location in Texas, their bill to location is Massachusetts, and they have requested a shipment to a freight forwarder of their choice in California, for export to ...2012-07-30
Can't get anyone in Louisiana to answer the phone. Have a general question about asset transfers. Child Company A in Colorado transfers asset to Child Company B in Louisiana. Is this considered a ...2012-07-27
As part of their medical plan offerings, three of our insurance-company clients provide, to their plan member-beneficiaries, an annual amount ($100 / year) of OTC products (toothbrushes, vitamins). ...2012-03-02
We are a NJ distributor. Our customer is in Alaska (no state sales tax). Small shipments are sent directly to customer in AK, but larger shipments we ship to a freight forwarder in WA. Should we be ...2012-02-07
We typically sell alarm systems below our cost because we make our money off the sale of the 36 month contract. Currently, we are tax exempt from the vendor where we buy parts and we pay sales tax as ...2012-02-07
We are a grease trap service company which removes grease from underground/ above ground traps for restaurants. We also un-clog any debris that may be in their line. It is my understanding of tax laws ...2012-02-07
We invoiced an international customer for equipment. The shipment was picked up at our York, Pennsylvania location for export to the United Arab Emirates. We charged the customer Pennsylvania sales ...2012-02-04
If we do not register to pay sales tax and do not get exemptions from our raw material suppliers but elect to pay sales tax on the raw materials and not charge our customers sales and use tax is that ...2011-12-21
We are a small contractor operating in New York. If we have a subcontractor working for us and we don't want to be charged sales tax, when it's a capital improvement project, how do we complete the ...2011-12-16
OUR BOOKKEEPERS FAILED TO PAY USE TAX OR SALES TAX ON THE GAMES WHEN THEY WERE PURCHASED. HOW MANY YEARS CAN THE STATE GO BACK? IS THERE A STATUTE OF LIMITATIONS ON THE TIME FOR COLLECTION?2011-12-12
When filing sales tax returns, is a company required to include all sales or just taxable sales? 2011-09-15
We are a fairly new NC consulting company that occasionally buys products and resells to our customers, also located in NC. I am unclear about what sales and use tax to pay. On products that we ...2011-08-25
We collected sales tax starting in 2005. It didn't get reported until 2007-2008 and we were hit with huge penalties that are more than the actual tax and we can't pay it. Is there a statue of ...2011-08-24
We provide Commercial Concrete Repair and Restoration services. We pay sales tax on all the material we purchase, do we then turn around and charge the customer sales tax? 2011-08-16
We closed the business, filed personal bankruptcy and moved to a different state. Sales tax were not covered in the bankruptcy. How long can Georgia try to collect, how much interest and fees can they ...2011-08-08
We have graphic design services company, and is going to be selling handmade t-shirts in the future. We applied for the state tax ID in GA, and we got a letter saying that I need to be paying taxes ...2011-08-07
I own a bar in California. I am wondering what would be considered a nontaxable transaction when reporting sales tax. The deductions which would be reported on line 11..2011-08-04
I believe our CT sales tax has been increased to 6.35% as of today, July 1. I have existing orders placed by customers who paid a deposit, including 6% sales tax. Many of these orders will be ...2011-07-06
I just found out that my company is supposed to be collecting sales tax. We have never collected sales tax,therefore never remitted to the state. What do we do now?2011-07-05
General Contractor in NC purchased generators for water plant in VA. The company in VA delivered the generators to NC. On the invoice we paid VA sales tax.. They are now trying to collect NC Sales tax ...2011-06-26
I have a new business that started in 2011. I am not sure how to file and pay the state taxes back, that I have collected. Essentially, I wanted to know how I could pay back my sales tax collected ...2011-06-23
We sell music downloads online. We'd like to start selling physical CD copies online. What sales documentation do I need before I start selling physical CDs?2011-06-22
Custom orders require a deposit, the balance run upon completion. If order is for out of state, no tax is applied or charged on the deposit, and then shipped out of state, no tax applied to balance ...2011-06-16
If I didn't collect sales tax this month do I still have to file a Sales/Use Tax Return? 2011-06-12
Are there any cases that were disallowed or partially disallowed because the business is cyclic though out the sampling period?2011-05-31
How much sales tax do we take out for a cd sold for 10$ (OH)2011-04-10
I have been through an audit and hearing we are going to court... Four years ago when I bought my register from a friend of forty years he told me that I no longer had to save the register rolls just ...2011-04-10
I want to fill out my sales tax form for 2010. I will have no sales to report. I fill out the sales taxes annually. What form do I use? Where at the Maine website is the form that I fill out? Thank ...2011-01-24
WE SERVICE MULTI STATE STORE LOCATIONS THAT ARE ALL INVOICED TO A RHODE ISLAND CORPORATE ADDRESS. ALL PARTS/SUPPLIES ARE PURCHASED IN RHODE ISLAND AND INSTALLED IN VARIOUS STATES. IN WHICH STATES ...2011-01-24
I am a Rhode Island Plumbing Contractor - I pay my sales tax for material and all other purchases with the exemption of sub-contractor made to the Vendor direct. I need to find the Rhode Island Sales ...2010-12-15
Can sales tax liability be reported at time of payment not time of invoice? 2010-11-03
We are a newly formed management company wanting to pay sales tax for the motel business. We are not the owners but we want to pay under our sales tax number. The property has a contractors' lien so ...2010-10-13
We are a manufacturer in California. If we sell goods to a company in California but ship the goods to same company's site in the State of Georgia, will we have to charge that customer Sales Tax?2010-10-13
In 1991 I owned a Bar which has since closed. The state of Wisconsin is saying I owe sale/use taxes for that year and have tacked on interest and penalties of $28,000 to add up to $41,000 and they ...2010-09-27
Our company has been in business in Nevada for the last four years. We have hired a web design company to create an e-commerce website to augment our business model providing our customer base with ...2010-01-28
How do I know if I should be collecting tax in a state?2009-06-01

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Sales Tax Questions answered by Diane Yetter.

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