Collecting and remitting taxes: They’re not the same thing
Remittance. It’s not a common word in the English language, but it’s an essential concept for online merchants to understand — if they’re going to comply with sales tax laws.
According to the dictionary definition, a remittance is the sending of money (or its equivalent) to a recipient at a distance. Economists often talk about the importance of remittances to developing global economies. In this case, they’re talking about the money emigrant workers send to their families at home after they’ve taken a job in another country.
But in the world of tax compliance, remittance has a different meaning. To understand it, an online merchant also needs to understand the theory and practice of how sales taxes work.
Sales Tax 101: Who’s actually paying?
For consumers, sales tax functions more or less the same whether they’re in Ohio or Maine: A percentage of the transaction is added to the sale price of taxable goods. But each state’s sales and use tax law is unique. In some states with sales tax, the tax is imposed on the seller, but the seller is allowed to pass that along to the customer, and most do. New Mexico is one such state.
In other states, sellers are legally obligated to collect sales tax from buyers — and are not allowed to pay the tax themselves.
Either way, if a business doesn’t collect sales tax as specified under the law, state and local tax authorities could hold that business liable for back taxes.
And if the business doesn’t remit sales tax as required by law, that business may face criminal charges in addition to financial penalties and interest charges.
Collecting and remitting, therefore, are two separate steps in the process of complying with sales tax laws. Collecting is the process of obtaining money from your customers to cover your tax obligations; remitting is when you pass that money on to the appropriate tax authorities.
That’s the easy part. The tough part is figuring out how much to collect, and where and when you need to remit it.
Collection: Figuring out how much
All but five U.S. states have a statewide sales tax (the exceptions are Alaska, Delaware, Montana, New Hampshire, and Oregon). So do Puerto Rico and the District of Columbia.
(We should also note that while Alaska doesn’t have a statewide sales tax, it does allow local jurisdictions to establish their own sales taxes. And Montana has a provision that allows certain resort communities to levy a sales tax.)
So the first step in calculating the tax due on a transaction — and how much the merchant needs to collect from the customer — is determining what states they’re doing business in, then understanding whether there are also tax requirements from counties, cities, or other local jurisdictions.
If you were operating a brick-and-mortar store in the 20th century, that would be relatively easy. You’d know what state (or states) you had locations in, and since that’s where the transactions took place, that’s where you’d owe tax. (Physical nexus , in lawyer speak.) There were complicating factors, of course —– different products may be taxed at different rates by one jurisdiction. But on balance, you just needed to figure out the combined state and local sales tax rates for each of your locations, and apply those rates on each transaction to ensure you’re collecting the right amount.
But the U.S. Supreme Court in 2018 changed all that with its decision in South Dakota v. Wayfair, which overturned the physical presence requirement. The Wayfair decision allowed states to impose a sales tax obligation on sellers with no physical presence. (Economic nexus, as the lawyers say.)
That made calculating sales tax much more challenging. There are more than 13,000 separate tax jurisdictions in the United States — some of them overlapping — and online merchants can have tax obligations in any number of them. (You can get a free Sales Tax Risk Assessment from Avalara that shows the states where your business may have tax obligations in.)
Once you know the states where you have nexus, you need to understand where your customers are and what the tax rates are where they live. Given the complexity of achieving this, some merchants may be tempted to take shortcuts in calculating how much tax they need to collect from buyers. There are two problems with this,
- If you don’t collect enough, you run the risk of having to make up the difference between what you’re obligated to remit to state and local jurisdictions and what you collected out of your cash reserves.
- If you collect too much, you run the risk of alienating customers, and losing sales to competitors who correctly calculate the exact amount they’re obligated to remit, and only collect that amount from customers. You could also face legal action.
One more thing to consider: Depending on who your customer is or what they intend to do with the goods they’ve purchased from you, specific sales might be exempt from sales tax. But, you as the seller will need to have documentation —– typically in the form of a tax exemption certificate —– to validate and confirm why you didn’t collect sales tax on a specific transaction.
Remittance: Where and when does it go?
Once you’ve collected the cash you need to pay your taxes — and accounted for your tax-exempt sales — it’s time to remit those taxes to the appropriate authorities.
The first step is registering as a business with the states you have customers in. The next is to file monthly, quarterly, or semi-annual returns.
In much of the United States, merchants remit taxes to a state-level agency, which then distributes the tax dollars to the local agencies that get a cut of the funds.
However, there are some states — Alabama, Colorado, and Louisiana for example — that have granted “home rule” status to all or some of their local jurisdictions. This means that if you’re making sales into those states, you may have to register and file returns with those local agencies too.
Compounding the complications, each state (plus D.C. and Puerto Rico) has its own filing requirements and deadlines. Most states require returns to be filed and taxes remitted on the 20th day of the month., But Florida requires payments on the first, Maine on the 15th, and a handful of states on both the 25th and last day of the month.
And then there’s Ohio, which for some reason, set its deadline on the 23rd day of the month. (Ay, oh, way to go, Ohio.) For sales over certain thresholds – which vary depending on whether a business is paying monthly, quarterly, or semi-annually -- Ohio requires merchants to remit tax payments via electronic funds transfer (EFT).
Despite the odd day of the month for filing and the varying EFT requirements, Ohio’s requirements aren’t even close to being the most -complex in the nation. To explain in more detail, we’ve compiled a list of the 10 trickiest states with the most complicated rules for filing and remittance.
If all this seems confusing and complex: You’re right; it is.
That’s why we’ve created resources to help small businesses figure it out. Our Small Business FAQ has answers to the most -common questions merchants have regarding tax compliance.
Cover photo by Canva
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