Sales Tax Guide: How to Calculate & File for Sales Returns

Most entrepreneurs have heard of sales tax, but it is a matter of confusion and apprehension for many. As a fellow entrepreneur, your first question might be whether or not you need to pay sales tax, and if you do, what the sales tax percentage is and how it applies to your products.

Thing is, it's not that straightforward: there are several rules to sales tax calculation, depending on your business, state, and many other exceptions.

To ensure your calculation is correct and effective, let's delve into the basics of sales tax and how to file it efficiently.

What Is Sales Tax?

In the United States, sales tax is the tax placed on the sale or lease of any product or service within the country. This tax is calculated separately by the state and does not have any national uniformity.

All states apart from Delaware, New Hampshire, Alaska, Montana, and Oregon levy a sales tax on goods. If you are a seller of taxable products, you must collect the sales tax amount from buyers. This amount is also applicable to services in certain states.

If you are the owner of a physical store at one location, it's easy to calculate and collect sales tax. However, the situation is slightly complicated if you have an online business or operate from various locations.

In such a scenario, you might need to collect different tax amounts from buyers. But before doing so, you must get a sales tax permit from the state to make your business legitimate. You will then be assigned a sales tax filing frequency with monthly, yearly, or quarterly due dates.

In some states, you must also pay a use tax, which is tax revenue from sales that for some reason missed sales tax collections.

Let’s say a craft seller named Shayla has purchased goods from a seller operating from a different state. That seller does not have the authority to collect sales tax in her state. In that case, Shayla has to pay the use tax while filing taxes in her state.

To be clear about the rules, she must be attentive to her state laws, especially when buying inventory from an out-of-state seller that does not take sales tax. Shayla also needs to find out the use tax rate for her state, which may be similar or different from the sales tax rate.

How to Calculate Sales Tax

Once you are familiar with the sales tax definition, you should learn to calculate it correctly. You can use online sales tax calculators for a more accurate job. Yet, it pays to know the basics of sales tax calculation.

Sales tax has a simple formula. You simply multiply the sales tax rate by the selling price of your product.

So, if the sales tax percentage is 5, the calculation will be:

The selling price of the item x (5/100) = Total sales tax

The first thing you need to know before calculating this is the sales tax rate of your state. Please note that each state has a different sales tax rate, and you need to know the exact percentage for the calculation to be accurate.

10 Basic Facts About Sales Tax

Before charging sales tax and filing for it, check out these basic federal sales tax facts.

1. Sales Tax Is State-Specific

As said earlier, the sales tax rate is governed by the states as there is no uniform federal tax rate. As many as 45 states in the US and the District of Columbia collect uniform sales tax statewide. In 38 states, local sales taxes are collected, which can be higher than the statewide sales tax percentage.

Although Alaska doesn't have a statewide sales tax rate, it allows local sales tax to be collected. Similarly, each state has its own laws in this regard, so you should be careful while making cross-state dealings.

2. Sales Tax Nexus or Permission Is Required to Collect Tax

With a state nexus, you can prove your business is legitimately connected to the state and needs to collect sales tax. You can possess nexus in your home state as well as additional states where you may be operational.

• To qualify for a nexus in an additional state, you need to have:
• Employees in that state
• A physical business location in the state, except for eCommerce businesses
• Inventory or affiliates
• A drop shipping arrangement
• Temporary sales
• A significant revenue or order amount from online sales in the state

3. You Must Have a Sales Tax Permit

Before you start charging sales tax from customers, you must register for a sales tax permit or license. The state’s taxing authority or the Department of Revenue can authorize you to start collecting sales tax.

4. Sales Tax Is Not Channel-Specific

Let’s say you run a clothing business that has a brick-and-mortar store as well as online delivery facilities. In such a case, you need to charge sales tax from all your customers, no matter how they buy the product.

The tax amount for customers coming to the physical store and the ones who are buying online must be similar. This rule applies even if you’re selling on other eCommerce sites like Amazon or eBay.

5. There Are Different Types of Sales Tax

Some states collect origin-based sales tax, whereas others collect destination-based sales tax. In the former states, you can collect tax based on your business location, while in the latter states, the buyer’s location determines the tax rate.

Different states have different rules about tax-exempt materials, standard tax rates, and other such details. As a result, your total tax amount will vary according to the location of the transaction.

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6. You Can File Sales Tax at Different Intervals

The more products you sell, the more frequently you need to file sales tax returns. Most states offer a monthly, quarterly, or yearly sales tax window, whereas some states require you to file monthly, irrespective of your sales volume.

Once you register for the sales tax permit, you will be informed of all these details. Alternatively, you can check them with your state’s Department of Revenue.

7. The Due Dates Also Vary

Sales tax due dates may vary by state. The most common date is the 20th of each month, but it can be the last day of the month or the 25th day of the month as well, depending on the state’s sales tax rules.

Be sure to stick to the deadline to avoid confusion and penalties.

8. Sales Tax Returns Must Be Filed By Everyone

Even if your business hasn’t made any sales in a particular period of time, you need to file a sales tax return. All registered sellers must declare their sales as per the required frequency. Failing to do that may attract a penalty or license cancellation.

9. You Can Be Rewarded for Filing on Time

Several states allow business owners a small discount percentage of the collected tax for filing returns within the due date. This is another motivating factor for sellers to pay their taxes on time.

10. You Pay Sales Tax Only Once

If you sell retail products after buying from a wholesaler, chances are you do not have to pay sales tax twice. In this scenario, you are exempt from paying taxes to the wholesaler if you qualify for a resale certificate.

How to File Sales Tax Returns

If sales tax filing and returns are confusing for you, keep reading to know how to do it efficiently.

1. First off, check your sales tax filing due dates and frequency. You can get this information when you file for the seller’s permit in your nexus state. Make sure to determine the frequency and date of tax filings before you proceed further.
2. Verify that your filing frequency matches your sales volume. Many states have varied frequencies depending on how much revenue your business made in the state.
3. Report the accurate sales tax amount while filing. You can calculate this with the formula given above: just recheck your state’s tax rate and include every sale from all sales channels.
4. If your state requires, divide the sales tax based on the county, city, or tax jurisdiction. This can take hours to figure out or calculate. To avoid this, you can automate your sales tax reporting through online tools.
5. After all your information is double-checked and verified, simply log into the taxing authority filing system of your state and complete filing your return.
6. You will be guided through the process to enable accurate payment submission.

Did you know: W9 form is to provide your correct Taxpayer Identification Number (TIN) to the person who is required to file an information return with the IRS to report, for example: Income paid to you

On a different but related note, make sure to review your business at least annually and check the sales tax rate, nexus states, and collection methods for your business.

To Conclude

The best way to ensure timely and accurate sales tax submission is to enable automation. Along with this, consulting bookkeeping professionals like Fincent will help you save precious hours on managing your books so you can focus on growing your business.