Sales Tax Compliance | Key Points You Need to Know

Sales tax is an essential part of running a business, but it’s not supposed to take a massive bite out of your profits. Instead, it’s meant to be a pass-through cost—something you collect from customers and remit to the tax authorities.

This system may seem straightforward, but staying on top of it is critical. Failure to collect or remit the proper amount of sales tax can lead to audits, penalties, and interest, which can harm your bottom line unless you can recover the costs from your customers.

With more states generating significant revenue from sales tax and continually adjusting tax rates, it’s clear this tax is here to stay.

In fact, sales tax collections represented approximately 23% of all state tax revenue in the U.S. in 2023 (U.S. Census Bureau). Businesses must adopt effective strategies to ensure compliance with evolving sales tax obligations, which can be incredibly complex when selling in multiple states.

To help you navigate this landscape, we’ve identified the Three Pillars of Sales Tax Compliance. By understanding and incorporating these pillars into your compliance strategy, you can set your business up for success.

What is Sales Tax Compliance, and How Do I Do It?

Sales tax compliance refers to the process of correctly collecting, reporting, and remitting sales tax to state and local tax authorities. Ensuring compliance can be challenging, especially for businesses operating across multiple jurisdictions, as each state and locality may have different rules and tax rates.

Non-compliance can lead to penalties of up to 25% of unpaid tax in states like California (Tax Foundation Penalty Guidelines). Staying compliant means understanding your specific obligations in each jurisdiction where you do business.

The Three Pillars of Sales Tax Compliance

Understanding Your Obligations

The first pillar, Consultation, is all about understanding your sales tax responsibilities. This step sets the foundation for your compliance journey. Whether you’re just starting or need to revisit your strategy as your business grows, knowing your sales tax obligations is critical.

• Economic Nexus: Following the Wayfair ruling, states now require businesses to collect sales tax if their sales exceed specific revenue or transaction thresholds. For example, California mandates that businesses collect sales tax if they generate $500,000 or more in sales to residents within the state.
• Physical Nexus: Even if your business doesn't meet economic nexus thresholds, having a physical presence—such as an office, warehouse, or employees in a state—can trigger tax obligations.

Calculation: Getting the Numbers Right

Accurately determining the amount of sales tax is crucial for compliance. This pillar involves applying the correct tax rates and understanding which products and services are taxable.

• State and Local Rates: Sales tax rates vary widely. For example, California has a 7.25% statewide sales tax rate, but local rates can push the total to over 10%. Conversely, Colorado has the lowest statewide rate at 2.9%, but local taxes can raise it significantly.
• Product Taxability: Some states exempt necessities like groceries and medicine. Only 13 states tax groceries for home consumption, and six states do so at a reduced rate (Tax Foundation Grocery Tax Report).

Compliance: Staying on Track

The third pillar, Compliance, involves following the rules and meeting your obligations consistently. This pillar is about filing your tax returns and remitting the sales tax you've collected to the appropriate authorities. Compliance can be tricky due to varying filing schedules and remittance procedures across jurisdictions.

Key Aspects of Compliance

• Registrations: Ensure you're registered to collect sales tax in all necessary jurisdictions. States like Florida and New York require businesses to register once they meet economic nexus thresholds.
• Tax Data Reports: Maintain accurate records of your sales and tax data. Many states require businesses to store sales tax records for up to seven years in case of an audit.
• Tax Calendars: Stay on top of filing deadlines. Filing frequencies vary by state; some require monthly, quarterly, or annual filings, depending on the amount of sales tax collected.
• Online vs. Paper Returns: Some states offer online portals for sales tax filings, while others still accept paper forms. It’s important to know which method is required for each jurisdiction.

Failure to file timely returns can result in penalties and interest charges. For example, in Texas, late filers may face penalties of up to 10% of the tax due, with additional interest accumulating over time.

Conclusion: Mastering the Three Pillars of Sales Tax Compliance

By mastering these three pillars—Consultation, Calculation, and Compliance—you’ll be well-prepared to navigate the complexities of sales tax and keep your business on the right track. Staying compliant not only helps you avoid costly penalties but also ensures smooth operations across multiple jurisdictions.

According to the National Federation of Independent Business (NFIB), nearly 50% of small businesses encounter sales tax compliance issues (NFIB Compliance Report). By integrating automated tools and staying proactive, you can significantly reduce the likelihood of audits and penalties.

The key to success is staying informed and proactive and utilizing the right tools to manage your obligations. With these pillars as your foundation, you can focus on growing your business without the stress of non-compliance looming overhead.