Registering, collecting and filing sales tax
Register, charge, document, book and remit, worked on Northwind's September: $760 collected, one resale certificate, and the October payment.
Nexus decides whether a seller collects in a state. Then come the mechanics: register, charge the right rate on the right sales, keep the paper for the sales you didn't tax, and file and pay on the schedule the state gives you. Northwind did all of it in September: $760 collected on one sale, none on another, and a liability of $760 carried into October.
Step 1: Register
Get a sales tax permit from the state's revenue department before collecting there: at once where you have physical presence, by the state's deadline after crossing its economic threshold. The state assigns a filing frequency.
Step 2: Charge the right rate
Charge the combined rate for where the sale is sourced, state plus any local rates. Most states source to the buyer's location. Home-rule cities run their own.
Step 3: Document what you didn't tax
Keep an exemption or resale certificate for every sale you don't tax. It's what proves to an auditor why no tax was charged.
Step 4: Book it as a liability
Credit what you collect to sales tax payable, a liability. It was never revenue.
Step 5: File and remit
File by the state's deadline for each period — monthly, quarterly or annually, as assigned — and pay what was collected. Some states let a timely filer keep a small discount.
Remitting, in the books
When Northwind files its September return, the payment clears the liability. No revenue and no expense: the tax was the state's money from the moment it was collected.
Remit September sales tax
| Account | Debit | Credit |
|---|---|---|
| 2300Sales tax payable | 760.00 | |
| 1000Cash — operating | 760.00 | |
| Balanced | 760.00 | 760.00 |
October: September's sales tax paid over with the return.
Wrong
Revenue $10,260.
Right
Revenue $9,500; sales tax payable $760.
Recording the whole $10,260 as revenue overstates the month by the tax and leaves nothing on the balance sheet for the state's $760.
Sales tax is the state's money in your bank account: register before you collect, credit it to a liability, and pay it over on the state's schedule.
In this lesson: whether software sold as a service is taxable, state by state. Nexus itself is the Wayfair lesson.
Pages in this lesson
1 page goes deeper, about 4 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Tax — not GAAP
- South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), syllabus (opens in a new tab)The Supreme Court ends the physical presence rule for sales tax collection (decided June 21, 2018)PDF · Free to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Sales tax payableSales tax charged to customers and not yet remitted to the state — a liability from the moment it is collected, never revenue, when the entity has elected to exclude such taxes from the transaction price
- Exemption certificateThe document a buyer gives a seller to claim a sales tax exemption — resale, manufacturing, an exempt organization — which the seller keeps to prove why it did not collect. New Mexico's version is the nontaxable transaction certificate (NTTC)Convention
- Home-rule sales taxA local sales tax that a home-rule city administers itself — its own license, return, base and audit — rather than through the state. Common in Colorado, Louisiana and Alabama
- Vendor's compensationThe share of collected sales tax a seller may keep, in states that allow it, for filing and paying on time — usually a small percentage, often cappedConvention
- Voluntary disclosure agreementAn agreement in which a business with unfiled state tax obligations comes forward before the state contacts it — often anonymously at first — and files and pays a limited lookback period, typically three to four years, with penalties waived and interest usually dueConvention
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- VAT / sales taxAdd tax to a net price or back it out of a gross one, and the parts still add up.
- Journal entry for sales tax collectedWhen a taxable sale is made, debit Cash or Accounts receivable for the total charged, credit Revenue for the price and credit Sales tax payable for the tax. When the return is filed, debit Sales tax payable and credit Cash.
- How sales tax is calculated: rates, sourcing, roundingHow sales tax is calculated: state plus local rates, origin vs destination sourcing, what’s taxable (SaaS varies) and rounding per line or per invoice.
- Registering in a new state: remote hires and nexusA remote hire or nexus in a new state means foreign qualification, payroll tax accounts and maybe a sales tax permit. What to register, in what order.
- Sales tax nexus for startups: when you owe tax in a stateSince Wayfair, selling into a state can create a sales tax obligation. How economic nexus works, why SaaS is taxable in some states and when to register.
- SalesTaxSummaryTaxable, exempt and collected by jurisdiction; the liability tied to the GL.