What Does It Mean to Remit Sales Tax?
Understand the essential steps for sending collected sales tax to the government, ensuring accurate reporting and maintaining compliance with state rules.
Sales tax remittance is the process of a business sending the sales tax it has collected from customers to the correct state or local tax authority. This is a legal requirement for businesses selling taxable goods or services, representing the final step in the sales tax cycle. The funds collected are held in trust by the business for the government and must be forwarded to the proper agencies to ensure compliance and avoid penalties.
Determining Your Remittance Obligations
A business’s obligation to remit sales tax is determined by nexus, a connection between the business and a state. This connection gives the state the authority to require the business to collect and remit its sales tax. Nexus is established in two primary ways: through a physical presence or through economic activity.
Physical presence nexus is created by having a tangible footprint in a state, such as an office, warehouse, or store. Employing workers who reside or work in a state, including remote employees, also establishes a physical presence. Storing inventory in a state, even in a third-party fulfillment center, is another activity that creates this type of nexus.
Economic nexus, established by the Supreme Court’s decision in South Dakota v. Wayfair, is based on the volume or value of a business’s sales into a state. Each state sets its own threshold, though a common one is $100,000 in annual sales. Once a business crosses a state’s economic threshold, it is required to register and remit sales tax there, even with no physical presence.
Once nexus is established, the state will assign a filing frequency dictating how often the business must remit taxes. This frequency is based on the amount of sales tax collected or total sales volume. Common frequencies are monthly, quarterly, and annually; higher-volume businesses are required to file more often, while those with lower volumes may be assigned a quarterly or annual frequency.
Information and Documentation for Filing
To remit sales tax, a business must first prepare a sales tax return, the official form for reporting sales and tax collections. Businesses can download the current version of these forms from the state’s department of revenue website. Using the correct form for the filing period is necessary to avoid processing delays.
The sales tax return requires a summary of sales activity for the reporting period. This includes the total gross sales and a separation of any non-taxable or exempt sales, such as sales for resale or to exempt organizations. This information is used to calculate the total taxable sales.
Preparation requires breaking down sales and collected tax by each specific jurisdiction, as rates can vary between the state, counties, and cities. The return will have fields to report the sales and tax for each local jurisdiction. This data must be organized to complete the return accurately.
The compiled data, including gross sales, deductions, and jurisdictional breakdowns, is transferred onto the sales tax return to calculate the total tax due. Even if a business had no sales during a period, most states still require filing a zero return to maintain an active account.
The Sales Tax Remittance Process
After completing the sales tax return, the business must submit the form and payment to the tax authority. The two methods for this are electronic filing and filing by mail, though state agencies increasingly encourage or mandate electronic submission.
Electronic filing is done through a state’s online tax portal, which requires creating an account. Businesses can input their return data directly into the online form or upload a data file. This method is the fastest and provides immediate confirmation of receipt.
Payment is also handled electronically through the state portal. Common methods are an Automated Clearing House (ACH) debit, also known as an electronic funds transfer (EFT), or payment by credit card. An ACH debit authorizes the state to pull the funds directly, while credit card payments may incur a processing fee.
Filing by mail involves sending the signed sales tax return with a check or money order for the tax due. The correct mailing address can be found on the tax form or the state’s website. To ensure proof of timely filing, use a mailing service that provides tracking, such as certified mail.
Post-Remittance Record-Keeping
After filing, a business must maintain organized records as proof of compliance. These documents include a complete copy of every filed sales tax return and definitive proof of payment. For electronic payments, this can be the confirmation receipt from the state’s portal or a bank statement showing the debit. For mailed payments, a copy of the canceled check or certified mail receipt serves as proof.
These records are required during a sales tax audit to substantiate the figures on the returns and prove timely payment. The required retention period is set by each state. Businesses must verify the specific requirements for each state in which they file, as retention periods can range from three years to six years or more.