As a result of the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. which allowed states to impose tax obligations on remote sellers, more businesses are now required to collect and remit sales tax in more states. Even without the Wayfair decision, businesses with a physical presence in a state have a sales tax obligation. While much of the focus on sales tax obligations is around calculations and getting the tax rate right, it’s the returns process that often poses further risk and confusion for businesses.
Preparing and filing sales tax returns is complicated and time-consuming because every state has its own rules, regulations, and schedules. In fact, a 2021 study found that small businesses spend on average more than $3,300 and 37 hours per month managing sales tax returns. The proof is in the pudding: sales tax returns can create serious trouble for small businesses.
To help manage this challenge, here are five things small businesses need to know about the sales tax returns process:
- Reporting and remittance aren’t the same thing
Sales tax filing is the act of filing sales tax returns and reporting the taxes you’ve collected to the relevant government authority. Remittance is the actual act of paying the collected taxes to the government.
- States have their own tax filing schedules and deadlines
Each state determines its own filing frequency and due dates for sales tax returns. Additionally, the frequency in which a business has to file returns may depend on the amount of sales made. For many states, the due date is the 20th day of the month in which the return is due.
However, it’s important to note that you may or may not receive notice of when your tax is due, so it’s important to be aware of both your frequency and your specific due dates to ensure that you’re filing on time and to avoid any late penalties.
- The filing process takes place mostly online
The first step in the returns process is gathering the forms you need from each in which you’re filing. Today, all states offer options to file and pay sales taxes electronically. These options include online filing and telefiling. Online filing requires setting up a business account through a secure system with the state tax authority.
A few states now require electronic filing for sales taxes. For example, Alabama requires electronic filing for all businesses and electronic payments for installments of $750 or more. Some require electronic filing for sales above a certain threshold only, and some still allow taxpayers to fill out and mail in paper forms. Understanding the correct filing and payment procedures for states varies and is essential in filing timely, correct returns.
- Tax calculations have a direct impact on returns
Sales tax rates and how they’re applied are changing all the time. This can make charging the correct tax tricky, especially when different rates for cities, counties, and other jurisdictions are involved. If the tax collected is incorrect on a return, businesses may have to process corrections. There are also deadlines for amended returns when issuing a correction.
- Late filings can result in penalties and fines
Following deadlines is essential to avoiding penalties and fines, which can be significant. Penalties may cost up to 5% per month up to a maximum of 25%, plus a failure to pay a penalty of 10%. The penalty may differ depending on the state, but it’s not something you want to learn the hard way.
On the other hand, many states offer incentives to taxpayers who file and pay early or on time by offering discounts on the amount of tax that must be paid.
Resources to simplify sales tax returns
While the sales tax return process can be onerous for small businesses, there are ways to navigate complexity and streamline the process. Outsourcing sales tax returns management to a certified third-party, like an accountant, can help streamline the returns process. These professionals take the required data provided by a business and prepare the returns for filing and payment on your behalf.
Additionally, technology exists that automates the entire returns process. Automatically pulling sales tax collected from point of sale and other billing systems, technology solutions can prepare, file, and remit tax on behalf of small businesses. Automated solutions also have the ability to constantly update tax rules, so businesses also benefit from access to the latest filing forms, deadlines, and instructions.
Handling sales tax returns is among the most onerous processes small businesses must manage and it only gets more challenging as a business grows. From tracking return schedules to navigating filing requirements, manually managing sales tax returns creates added costs for small businesses, and demands time that could be devoted to business building activities. While outsourcing returns management saves time and money, and decreases compliance risk, understanding the basics of sales tax returns is a critical first step for small businesses that seek to get and stay compliant.
Liz Armbruester is SVP of global compliance operations at Avalara. Liz has more than 20 years of leadership experience from a variety of technology sectors, including media, services, and software.
Tax stock photo by Vitalii Vodolazskyi/Shutterstock