Record Keeping for Sales Tax Purposes
The biggest sales tax challenge for retailers is often knowing how much tax to charge for any given order. A not-distant second challenge is figuring out what you owe when it comes time to file your sales tax return.
On the surface, this seems fairly straightforward. Collect the sales tax on each order, add it up, and send in the sum. In reality, it can be more difficult to determine the total sales tax due to a state over a given period of time.
Why is that?
Changes to Orders and Cancellations
First of all, often an order gets changed before it’s finalized. An item may be cancelled by the customer or removed due to lack of availability, while the rest of the products ship as originally purchased. Obviously, this change to the order affects the sales tax collected and ultimately remitted to the state. Your records need to show the final sales tax collected and due for each order as it shipped, whenever that differs from the order originally placed on your website.
The obvious corollary to this is a completely cancelled order. Your accounting system should show the tax for this order as $0, since the payment was never made and the goods never delivered.
A second place data can go wrong related to returns. When a taxable item is returned, you refund the price to the customer, as well as any applicable sales tax. That tax refund shouldn’t be included in the amount you show on your tax return.
If you charge a restocking fee on returned merchandise, you will need to be aware of how this affects the sales tax due on the order. States differ in the taxability of restocking fees. In the state of Washington, for example, the restocking fee is a taxable fee that falls under the “service and other activities” heading, so you must charge sales tax on the fee itself. On the other hand, New York and New Jersey do not consider the restocking fee to be a taxable property or service. Colorado is a special case; if a restocking fee is charged, then the full amount of tax due on the original purchase must still be remitted; the tax is not reduced in accordance with the refunded portion of the original price.
As an aside, make sure your business practices relating to restocking fees are in accordance with your state’s laws. New York and California, for example, specify rules about how the restocking fee must be disclosed prior to the sale.
Most accounting packages will track sales, partial refunds, cancellations, and returns for you, but any software package is only as good as the data you put into it. As such, you should keep accurate and up-to-date records of sales, cancellations, and refunds, so that the amount to remit is current and correct.
Third, there are orders that may be fully tax-exempt. If you have a wholesale side to your business, you will have sales that are not taxable. Likewise, if you sell to tax-exempt organizations, like schools and non-profits, the order may not incur sales tax. Not only does this need to be taken into account when determining what your business has collected and owes, but you must be able to prove that the buyer claimed a tax exemption, by keeping a sales tax exemption certificate of file. And you must have a system to keep track of certificate expiration dates, so you can request a new certificate when the old one expires.
Purchases and Use Tax
Your own business purchases are important, too. In many states, if you weren’t charged sales tax by the seller, you’ll owe it as use tax instead. Keep your receipts so you can prove the purchase cost as well as any sales tax that you paid directly to the seller.
Keeping Track of it All
In addition to your financial records, having a record of due dates is useful too, especially as your business footprint grows and you develop a presence in multiple states. The sales tax due dates differ among states, and even for a given state, the frequency you must file may change depending on how much revenue your business generates.
A useful spreadsheet of due dates, confirmation numbers for electronic filing, or post dates for returns you physically mail, can be invaluable should you face a sales tax audit down the road. But it’s also useful as a reference as you go through the year, to make sure you meet all deadlines.