It’s that time of year when we are heads down reviewing our prior years’ books to ensure we have accounted for all our revenue and expenses. We have sent out our W2s and 1099s so our staff and contractors can file their taxes.
At this point we have hopefully sent our box of receipts to our accountants to weed through and maximize our deductions and figure out how much we need to send to Uncle Sam (or how much we are getting back!) Or you might be that accountant who is receiving those documents; if so, we will see you sometime after the snow thaws. If everything is running smoothly, and processes are in place, this should be smooth sailing for both the business owner and the accountant. (Every accountant reading this just rolled their eyes…)
This is also the time of year where we feel we are working for the government, not ourselves. Our entire focus becomes about how much we owe. Payroll must be reconciled to make sure the deductions are correct, expenses must be categorized, and income must be accounted for. What this means is that tax time is the perfect time of year to determine if your business could be running more efficiently. The more information your accountant must ask you for, the more areas of improvement your business is likely to have. This is a great time to reevaluate your business processes.
There are very few people reading this that are filing their own federal or state tax returns or calculating and remitting their own payroll taxes. In the vein of taxes, one of the most complex processes that a business goes throughout the year — that always has room for improvement — would be sales tax calculations and remittances. Yet, many businesses are calculating and remitting sales tax returns on their own. The cold truth is, if sales tax is due, it does not matter if you collect it from your customer or not, you owe it.
In 2023 alone, there were over 8700 sales tax changes throughout the year across all jurisdictions. Anyone that is shipping products or performing services in any state also may be liable to collect sales tax on behalf of those states. Most states (not all) require registration when you have shipped or provided services of over $100,000 or 200 transactions in a given state in the prior calendar year. Several states have banded together on inter-state agreements that allow for the sharing of sales tax-related information, which will make detection of these transactions much easier across the states.
Sales tax does not just involve the question “where” like most people think. Sales tax also involves the questions “who”, “what”, “where”, and why.”
Who: Is the customer taxable (do they have a tax-exempt certificate, and is it current)?
What: What are you selling? Different products can have different tax rates within the same state tax jurisdiction. For example, in Washington State gluten free candy is taxed, where candy made with flour is tax exempt. That’s because the definition of candy does not include flour. Each state has a multitude of intricacies like that.
Where: Where a product is shipped to is the basis for the tax rate (with a few exceptions). For example, in California taxes range from 7.25% – 10.25% with 470 sales tax jurisdictions across the state.
Why: Many people do not realize that the seller is responsible for understanding why a company is claiming tax exempt status. If a drywall company purchases a photocopier and tries to claim it as tax exempt the onus is on the seller to determine if that is a reasonable resale item when allowing the exemption.
Admittedly, this might have your head spinning. Further, if you are using QuickBooks alone to calculate your sales tax liability, the sales tax rate (one rate) is set at the “customer billing to” level. There is no option for a sales tax rate on the job or ship to level where it belongs. You cannot even vary the sales tax rate by item.
In order to calculate sales tax in QuickBooks, it can be a highly manual process on an order by order basis. The one thing to know is that any process that is highly manual is prone to misinterpretation and mistakes.
As you finish off your income taxes, this would be a great time to review your other process, and figure out where you can improve and automate. Setup a time to talk to one of our specialists about how we can help.
