Sales tax filing: registration to return, step by step

Decide where the client must register

Sales tax nexus comes from one of two places. Physical presence, such as an office, warehouse, employee, contractor or inventory in a state, creates the obligation with no dollar test. Economic nexus is the second route. In South Dakota v. Wayfair, decided June 21, 2018, the Court overruled the physical-presence rule of Quill Corp. v. North Dakota. The South Dakota law it reviewed reached sellers that deliver more than $100,000 of goods or services into the state, or that engage in 200 or more separate transactions, in a year.

Each state now sets its own threshold. Texas applies $500,000 of total Texas revenue in the previous 12 calendar months to remote sellers. A remote seller under that figure does not need a Texas permit or to collect use tax. A client over the line needs a permit before its next sale into Texas.

Run the review from the sales report by state for the previous 12 months. Test physical presence first, then the thresholds, then the marketplace sales.

Register before the first taxable sale

Register in a state before the first taxable sale into it, not after the first return comes due. In Texas, the Comptroller notifies the applicant by letter, after the permit is approved, whether the business will file monthly or quarterly. That letter is the notice that controls the due dates.

Use the exact legal name from the entity's state filing and the federal EIN. The state account, the marketplace records and the exemption certificates the client receives should all show the same entity name.

Decision rule: if a marketplace collects tax for the client in a state where the client holds no permit, ask the client whether it has a permit there. If it does not, the client registers before its next direct sale into that state. The usual failure is a client that registered only at home, passed the threshold in a second state and kept selling. The fix is a yearly threshold review and a dated registration decision in the file.

Set the filing frequency from the state notice

Do not choose the frequency. The state assigns it. California's CDTFA assigns the filing frequency at registration, based on reported sales tax or anticipated taxable sales. The options it lists include quarterly prepay, quarterly, monthly, fiscal yearly and yearly.

Texas due dates fall on the 20th. A monthly report is due on the 20th of the month after the reporting month. Quarterly reports are due April 20 for January to March, July 20 for April to June, Oct. 20 for July to September and January 20 for October to December. Yearly reports for the prior year are due January 20.

California quarterly prepayment works differently. Prepayments are due on the 24th of the month after each prepayment month, so the January prepayment is due February 24 and the November prepayment is due December 24. The quarterly return is due April 30 for January to March, July 31 for April to June, October 31 for July to September and January 31 for October to December.

Decision rule: if the state notice says monthly and the client expects sales to fall, ask the state in writing to change the frequency and keep filing monthly until the state confirms. Switching to quarterly on your own assumption is an easy way to earn a late-filing notice.

Build the return from the sales report

A return starts with gross sales for the period and removes what is not taxable. The layout below is generic, not any state's line numbers. Gross sales, less sales to customers with valid exemption certificates, less marketplace sales the marketplace collected tax on, less refunds and returned goods, gives taxable sales. Tax is taxable sales multiplied by the rate for each jurisdiction.

Worked example for one monthly period, using a hypothetical gross sales figure of 100. Subtract resale sales backed by valid certificates, 14. Subtract marketplace sales the marketplace certified it collected tax on, 11. Subtract refunds, 2. Taxable sales are 73. At an illustrative combined rate of 8 percent, the tax is 5.84 on every 100 of gross sales. That figure should tie to the tax collected in the point-of-sale report for the same period.

When the tax collected does not tie to taxable sales times rate, the cause is usually a rate that was not updated in the point-of-sale system or a local rate that was missed. Pull the rate table with its effective dates and compare it to the month the rate changed, not the month the return is filed.

Whether shipping and handling is taxable depends on the state. Take the answer for each state from that state's guidance and do not carry one state's answer across. Check each state's rule for a period with no sales as well, because some states still require a return for a quiet period.

Net out marketplace sales only when the marketplace collected the tax

A marketplace facilitator collects and remits tax on the sales it facilitates. In Texas the rule sits in Tax Code section 151.0242, and the Comptroller says a marketplace seller still needs its own Texas tax permit and must file its sales and use tax returns on time. The marketplace takes on the collection duty for its sales. It does not take on the filing duty for the seller's other sales.

Pull each marketplace's report for the period and sort every order into one of two groups: tax collected by the marketplace, or tax the seller must collect. Only the first group comes off the taxable line. Sales through the client's own website, wholesale invoices, and any marketplace that did not collect tax in that state stay on the return.

The usual failure is the client removing all marketplace revenue because the marketplace handles tax. The state then sees taxable sales that are too low and tax collected that does not match. The fix is the per-order split, with the marketplace report total tied to the sales report and to the deposits.

Keep exemption certificates that match the sale

The SST Exemption Certificate is the multistate form that SST member states accept, and all 24 member states accept it. A seller does not need to be registered in the SST system to take it. The SST instructions also warn that not all states allow all exemptions listed on the form, so check the exemption type against the state where the goods are delivered before accepting it.

Decision rule: if a customer says the purchase is for resale, ask for a certificate for the state of delivery, with the customer's permit number filled in, and check that the purchase is inventory for resale. A certificate that claims resale for office supplies does not support an exempt sale. If no valid certificate is on file, treat the sale as taxable and log it on the missing-certificate list with the tax exposure.

Keep a copy of each completed certificate with the invoice for each exempt sale. The SST instructions say the purchaser gives the completed certificate to the supplier and keeps a copy, and that certificates are not sent to the SST Governing Board or to the states. The form does not set an expiration date, so set your own review date each year and whenever the customer's name, address or tax ID changes. Keep records at least as long as each state's assessment period.

Certificates are where the work drifts. Usual's reminder schedule can ask each client every month for its sales report and new certificates, and send reminders only while nothing has been uploaded.

Fix the failure modes before the return is due

Certificate for one state used on a sale into another. Fix it with a certificate file for each state, with the state code in the file name, and check the delivery state before the sale is marked exempt.

Bank deposits used as gross sales. Deposits include tax collected, shipping, refunds and transfers, so they do not tie to the return. Fix it with a sales report by state, reconciled to deposits every month.

A rate change missed in the point-of-sale system. Fix it with a dated rate table that shows the effective date and the person who approved the change.

A missed period after registration. Fix it by putting each state due date on the firm calendar, with an internal deadline five business days earlier. Send the client a request that reads "Please upload last month's sales report and any new exemption certificates by the 5th." Use the same wording each month.