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 
Should U.S. sellers collect sales tax on orders shipped directly to to Europe? 2014-09-01
Should we collect tax for delivery address or where we know it will be installed? 2014-07-15
Should sales people include sales tax on quotes? What if order is accepted but customer requests drop-ship to other state?2014-06-17
We are a Minority Business Entity (MBE). What is best way to manage sales tax on purchases, per our example? 2014-03-15
We have nexus in 15 states and have begun obtaining sales tax licenses in each. We were told we need a (registered) agent in each. 2013-02-25
Our customer has location in TX, bill-to in MA and wants item shipped to freight forwarder in CA - for export to Mexico. Do we collect CA sales tax? 2012-07-30
Can't get anyone in LA to answer the phone. Are asset transfers taxable in LA? 2012-07-27
We purchased a trade show booth out of state, no tax charged. Will NJ consider this taxable and want the use tax? 2012-03-23
As part of medical plan, we provide members $100/yr of OTC products. Are we required to pay sales tax on our transfer of OTC?2012-03-02
We have a customer in AK (no sales tax). We ship some orders directly to AK, but for larger ones we use WA freight forwarder. What about WA tax? 2012-02-07
We sell alarms below cost as we make money off the sale of contract. Currently, we are tax exempt as a prime contractor. Should we be paying sales tax?2012-02-07
We are a service company. It is my understanding that you do not tax services? Is that correct? 2012-02-07
We invoiced an international customer for a shipment picked up at PA location for export to the United Arab Emirates. Was it correct to charge PA sales tax? 2012-02-04
If we do not register to pay sales tax and do not get exemptions from our suppliers,is it legal to not charge our customers sales tax? 2011-12-21
We are a small contractor operating in NY. What if we work with a subcontractor and we don't want to be charged sales tax on a capital improvement project? 2011-12-16
Our bookkeepers failed to pay use tax or sales tax on items purchased. Is there a statute of limitations on the time for collection? 2011-12-12
We are providing software and consulting services to Canadian company, for use in Canada. Is any sales tax due and how is it remitted? 2011-12-09
I am a printer located in Allegheny county but I have several clients in different counties. Do I charge them sales tax for my location or theirs? 2011-10-17
We have heard that some states have "home-rules" where you may need to file by city/county/district. How many returns that would entail?2011-09-16
When filing sales tax returns, is a company required to include all sales or just taxable sales? 2011-09-15
We are a consulting company that buys and resells some products. On resale items, it seems as though tax is being paid twice?2011-08-25
We collected sales tax but didn't report until 2-3 years later. We were hit with penalties. Is there a statue of limitations? Can we negotiate? 2011-08-24
We provide services. We pay sales tax on all the material we purchase. Do we then charge the customer sales tax? 2011-08-16
We closed the business, filed personal bankruptcy and moved to a different state. How long can Georgia try to collect sales tax? 2011-08-08
Our Canadian company sells to US states. We shipped to client in WY with invoice to TX. If we need to charge tax, do we base on ship-to or bill-to? 2011-08-08
We self-assess use tax. For services, do we use the jurisdiction where services are performed or jurisdiction where the services will be used? 2011-08-08
Isn't the end user strictly liable for any applicable use taxes in a state? 2011-08-07
We have graphic design services company, and sell t-shirts. Do we have to file taxes on services and the supplies? 2011-08-07
I own a bar in California. What would be considered a nontaxable transaction when reporting sales tax? 2011-08-04
Our state sales tax rate is about to increase. How do we handle custom orders with paid deposits, which are picked up when new rate is in effect? 2011-07-06
I just found out that my company is supposed to be collecting sales tax. We have never collected (nor remitted) sales tax. What do we do now?2011-07-05
Our Tennis Department purchased calendars from to distribute to members as promos. We were not charged sales tax? Is that ok?2011-06-27
General Contractor in NC purchased items for plant in VA. Company in VA delivered to NC. VA sales tax was paid, but now they want NC sales tax on 2 old invoices. 2011-06-26
I have a new business. I am not sure how to file and pay the state taxes back, that I have collected. I charge sales tax on all invoices. 2011-06-23
We sell music downloads online. We'd like to start selling physical CDs online. What do I need to do before I start selling? 2011-06-22
Custom orders require a deposit - but for out of state orders, no sales tax is charged on deposit. What do we do if customer then shows up to pick up order?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
Regarding sampling periods - Are there any cases that were disallowed or partially disallowed because the business is cyclic?2011-05-31
How do we determine how much sales tax to charge? 2011-04-10
I bought a register and was told that I no longer had to save the register rolls just the daily report. Is that correct? 2011-04-10
Which states accept the SST Exemption Certificate as a Resale Exemption? Which states do NOT? 2011-02-22
I want to fill out my Maine (annual) sales tax form but have no sales to report. What form do I use? 2011-01-24
When a third party export shipment is shipped directly to a port and out of country, should we charge sales tax?2011-01-24
We service multi-state stores, all invoiced to a RI corporate address, but parts/supplies are installed in various states. How should sales tax be paid? 2011-01-24
I am a RI Plumbing Contractor. I pay sales tax for material with the sub-contractor exemption. But when I make a sale, I do charge sales tax. Correct? 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. Is there a way to pay sales tax under our corporation and not the owners?2010-10-13
We are a CA manufacturer. If we sell goods to a CA customer but ship to their GA office do we charge sales tax?2010-10-13
I owned a business which has since closed, but the state is saying I still owe sales/use tax. Is there a statute of limitations? 2010-09-27
The CA state sales tax registration form asks for some personal information. Do we really need to provide all such information? 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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