Paying sales tax is an essential responsibility for every business owner. Once you’ve collected sales tax from your customers, your next step is to remit it to the appropriate tax authority. While this process might seem straightforward, there are several nuances and deadlines that you must adhere to so you avoid penalties and maintain compliance. 

Here, we break down the steps to ensure you’re handling your sales tax obligations efficiently.

Understanding sales tax: a quick primer

Before diving into the payment process, you should understand what sales tax is and why it matters. Sales tax is a consumption tax imposed by state and local governments on the sale of goods and services. As a business, you act as an agent for the government, collecting this tax from customers and then transferring it to the appropriate tax authorities.

The importance of proper sales tax management cannot be overstated. Failure to collect or remit sales tax can result in hefty penalties, audits, and even legal trouble. Now, let’s break down the process of paying your collected sales tax.

1. Understand your sales tax filing requirements

The first thing you need to determine is your sales tax filing frequency, which is typically assigned by your state’s Department of Revenue. This frequency — monthly, quarterly, or annually — is based on your business’s sales volume. 

Monthly: For high-volume sellers

Quarterly: For medium-volume sellers

Annually: For low-volume sellers

It’s important to stay informed about your filing schedule, as missing a deadline can result in fines and interest charges.

2. Register for a sales tax account

If you haven’t done so already, you’ll need to register for a sales tax account with your state. This account is your gateway to filing returns and making payments. Registration is usually a straightforward process that can be done online through your state’s Department of Revenue website. Once registered, keep your account details safe and accessible for future filings.

3. Calculate the sales tax you owe

Next up is calculating the total sales tax you’ve collected during your reporting period. This can typically be done through your point-of-sale (POS) system, which should provide a summary of the taxes collected. Ensure your calculations are accurate and reflect the correct tax rate for your state or locality. Errors in calculation can lead to underpayment or overpayment, both of which can cause issues down the line.

4. Prepare and file your sales tax return

Most states require businesses to file a sales tax return, even if no sales tax was collected during the period. The return serves as an official record of the taxes you’ve collected and are now paying. Filing is typically done online through your state’s tax portal, where you’ll enter the details of your sales and the corresponding taxes collected. Some states may offer simplified forms or pre-filled returns based on your previous filings, but it’s always wise to review the details carefully before submitting.

5. Make your payment

After filing your return, the next step is to remit the sales tax you owe. Payment methods vary by state, but most allow online payments directly through a tax portal. Some may still accept checks or electronic funds transfers. Ensure your payment is processed on or before the due date to avoid penalties. It’s also a good idea to keep a confirmation or receipt of your payment for your records. Many states offer a small discount (often 1-2%) for filing and paying on time or early. While it may seem insignificant, these savings can add up over time, especially for businesses with high sales volumes.

6. Maintain accurate records

Proper record-keeping is vital for managing your sales tax obligations. Keep detailed records of all transactions, the amount of sales tax collected, and the payments made to the state. These records are invaluable if your business is ever audited, and they make you prepared for future filings.

7. Automate the process

Managing sales tax can be time-consuming — especially for small businesses. Consider using automated solutions like DAVO by Avalara, which can streamline the entire process for you, from calculating sales tax to filing returns and making payments. Automation reduces the risk of human error and frees up your time to focus on other aspects of your business.

Common Sales Tax Pitfalls to Avoid

• Missing deadlines: Late filings often incur penalties. Set up reminders or automate your filing process to stay on track.
• Incorrect calculations: Double-check your math or use software to reduce errors.
• Ignoring rate changes: Tax rates can change. Stay informed about any updates in your jurisdiction.
• Neglecting use tax: If you purchase items for resale without paying sales tax, you may owe use tax. Don’t forget to include this in your calculations.
• Mishandling exempt sales: Ensure you have proper documentation for any tax-exempt sales to avoid issues during an audit.

Remember, the key to sales tax success is consistency. Set reminders, create a system, and make tax compliance a regular part of your business rhythm. Your future self (and your accountant) will thank you. For more resources and expert guidance on managing your sales tax obligations, contact. DAVO.