Staying compliant with sales taxes can be a challenge. You need to keep track of different sales tax rates across the country, deal with constantly changing rules and exemptions, and make sure to remit your collected taxes and return on-time. And this is just for normal, everyday transactions. There are a few tricky situations that can leave just about anyone feeling confused about tax law. Here are the answers to some problem scenarios that regularly come up in the world of sales taxes.
Taxes on shipping
One common question that business owners have is whether or not they need to collect taxes on the cost of shipping. On one hand, they are charging their customers for this extra cost. On the other, the money coming in isn’t revenue for the business. The answer comes down to a few factors.
First of all, does your state charges taxes on shipping? Eighteen states do not, so if your business is in one of these states, you won’t need to charges sales tax for shipping in-state. Taxability of shipping also can depend on whether the shipping charge is stated separately on the invoice.
If your state does charge sales taxes on shipping, it depends on whether or not the sale itself is taxable. If you’re selling something that is taxable, you also need to collect taxes on the cost of shipping. If you’re selling something that is exempt from sales taxes, you don’t need to collect sales taxes.
The situation gets a little more complicated when you’re shipping out-of-state. You typically don’t need to collect taxes on any portion of an out-of-state sale unless you have nexus in the other state. Nexus is when your business has some presence in the other state, like owning a building. In this case, you would need to collect sales taxes for the other state based on the sourcing rules of the other state. Destination-based states would have you charge sales tax on shipping for taxable sales A) based on the states shipping rules, and B) at the rate of the “ship to” address. Origin-based states would work similarly but the sales tax rate would be based on the location generating nexus for your business.
Taxes when a customer pays in installments or is late on payment
Completing a sale takes two steps. First, the customer agrees to make a purchase from you and second, you need to collect payment for the sale. For smaller sales, this happens all at once. However, if you’re selling larger items, there can be a significant gap between when you make the sale and when you collect payment, like if you make a sale on credit, in installments, or a customer is just late on payment.
In these situations, the process for collecting sales taxes depends on your accounting system for recognizing sales. If you use an accrual system, you recognize a sale as soon as it is made, not when you collect payment. You’ll need to remit sales taxes for this sale on your next sales tax return, even if it’s before the customer makes payment.
If you use a cash system, you don’t recognize a sale until you receive payment. If you get paid in installments, you’ll need to collect the sales taxes on each separate installment. If a customer is late on paying you for a sale, you won’t need to remit anything to the government until the payment comes in.
Taxes when a customer doesn’t pay
If a customer doesn’t end up paying you for a purchase, it can create another problem for sales taxes. This doesn’t matter for a cash system because you still haven’t remitted any taxes. However, if you’re using an accrual system, you’ve paid sales taxes for a sale that you’ll never receive money for. In this situation, the government will give you credit for the excess taxes. For example, in Texas this is known as a bad debt deduction. You’ll be able to carry this deduction over your next sales tax return to reduce the total you’ll need to pay for that period or you could be eligible for a sales tax refund.
Taxes for rebates and coupons
One other tricky situation is when you are selling a product at a discount because of a rebate or coupon. Do sales taxes apply to the original value of the good or only to the discounted price? The answer comes down to who is providing the discount: is it your business or your supplier?
If your business is providing the discount, then sales taxes only apply to the discounted price. If the discount is coming from your supplier, then you still need to collect sales taxes on your original sales price. This is because the government considers a supplier rebate to count as an adjustment after the sale in your store took place.
Staying compliant with sales taxes isn’t always easy because of tricky situations like these ones. However, now that you understand how to get around these issues, your future sales tax returns should be a little more manageable.