Sales Tax Return Basics
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat discuss and answer questions about sales tax returns.
Here’s a glimpse of what you’ll learn:
The difference between online vs. paper returns
Three of the most common methods for balancing
Notice management
The discrepancies between tax collected and tax remitted
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More your go-to resource for all things state tax related. Now here is your host, Michael Fleming.
Michael Fleming: Hi, Mike Fleming here, founder of Sales Tax and More and today's co-host of the Sales Tax and More Podcast where we talk about everybody's favorite topic, which is of course sales tax. And today we're gonna talk about some sales tax return basics, some things I think that you need to know about.
But first, let me introduce you to my co-host, Ellie Moffat.
Ellie Moffat: Hi everyone. It's great to be here and we're excited to talk about some of the sales tax return basics. We go over this more in depth in one of the webinars
[00:01:00] that we do. So there's recordings of that. You can see versions of it prerecorded that offer CPE or you can attend one of those webinars live to get a more in depth explanation.
But today, just some of the basics. Before we get started, quick introduction for sales tax and more. We are a full service consulting and solutions firm and we have a really great team here of experienced tax professionals, who are very dedicated to your state tax and related needs.
So we do a lot of sales tax returns, sales tax registrations, consultations, research, audit, defense, and like our name states more. So that being said, Mike, why don't we get into it? There's a lot I know you can say, so we'll touch on just a few things here. Let's start out by talking about online versus paper returns.
Michael Fleming: Okay. Paper returns. This is how historically everything was done. When I started my career, we did everything on paper and as online returns
[00:02:00] started becoming more available, we still chose to do paper returns because it was just a lot easier process especially when you're doing multiple returns.
Nowadays, more and more states are making you do online returns. Either all returns have to be done online or sometimes when you cross a certain threshold, either based on gross sales or based upon taxable sales. Once you cross that threshold, then you have to do an online return.
And as I mentioned earlier, some states just won't allow you to do paper returns anymore. Even us dinosaurs have to adjust from time to time. And when we're adjusting, there are some big differences between paper returns and online returns. Let's talk about dates. That's number one.
In a state like Texas or a state like Florida, if you're doing a paper return, then it just has to be postmarked by the 20th. And, you're good
[00:03:00] to go. They're not gonna mark you late. But when you're doing something online, it's not the 20th anymore. It's now the 19th, so you have to have not only the return filed, but the money at the state by the 19th of the month in both Texas and Florida.
And there are lots of smaller differences along those lines. Dates are a big difference when you're switching from paper returns to online returns. Another is balancing. And states expect things to be a certain way, look a certain way. When you're doing a paper return, you send it in and it's at the state.
Now sometimes the state may come back and say, this number's gotta be changed. They may make adjustments for you but at least it's remitted. Whereas if you're doing an online return, and it's not exactly the way the state expects. The submit button may be grayed out, you may not actually be able to submit it.
And then
[00:04:00] you gotta go back and figure out, what am I doing wrong? Why can't I submit this? And a lot of times that's due to balancing. And balancing is, you gotta change some numbers because you gotta make it fit what the state's looking for and it may not be what you collected. And some common reasons for balancing is some states actually collect in dollars and cents. But when you go to do the returns, they are done in whole dollars. So you can't put the sense in there. So you got either round up or round down. So that could be one issue of balancing. Sometimes the rate that was collected may have been based on the wrong zip code or the wrong city or the rate source may have been wrong, and they're looking for a specific rate, a specific dollar amount.
So you've gotta make an adjustment in order to hit that submit button. And we call those adjustments balancing.
[00:05:00] Now, there are three primary ways to balance. One is called balancing to gross sales and tax collected. Another one is called a forward calculation. And a third one is called grossing up.
Those are the three most common methods of balancing. We use here internally a balancing to gross sales and tax collected. And we balance to those two numbers because in an audit, we think those are the two numbers that shouldn't change. They're the ones that are gonna be most scrutinized by an auditor.
So we don't want to raise any red flags. So we want them to be easily followed. So we balance to gross sales and tax collected. In other words, those numbers are not gonna change. Where we need to make our changes is exempt sales. And since I've started this business, I've been at two companies, and both companies, this company's my company, but my previous
[00:06:00] company we also balance to this method.
And I've never had any problems in all the years I've been doing this. That's why we use that method. When you're doing a forward calculation you're looking before you submit the return, you're running everything through the system. A handful of our clients say, Hey, we're unsure of our numbers.
We wanna make sure everything's right. Can you do a forward calculation? And our answer is yes. We will say, here's the rates that should have been collected, and any differences, they'll come out of their pocket. If there's any tax that was collected was too much. They still have to remit that because tax collected, not remitted is a major problem, but that's a forward calculation. The numbers are rerun prior to being submitted to the state, and it's a great tool for certain situations. But there's a software company out there that does that on every return or they were doing it they got taken over by another company.
I don't know if they're still doing it. It was
[00:07:00] TaxJar. But for a number of years, they were creating huge problems for their clients. Because there was one company in particular in one quarter, they told him that he under collected in California by $7,500. That starts to add up over time and across a bunch of states.
And by the way, they were wrong. But they don't give you an option of saying, no, you're wrong use my numbers. They just automatically went and did it. So they were creating a lot of overpayments and a lot of underpayments, which both of them are huge issues. So a forward calculation is a great tool, but it's not a one size fits all method that should be used for everybody.
So that's the second way. The third way is you gross up or make adjustments to your gross sales. You either make 'em higher or lower in order to fit the numbers. And there are
[00:08:00] some software companies that use this method. I think it's a horrible method because when a state comes in and audits you, they're gonna look at your gross sales and they're not gonna tie out to your IRS returns, which sometimes they ask to see those. They're not gonna tie out to your bank accounts. If they ask to see those, they're not gonna tie out in a number of different ways. So you're just asking for extra work if you are getting audited. You may be able to explain it all away.
But explanations are time and time is money, especially when it comes to an audit. I think the best way to do this and a number of software companies do it this way. I think the most common way of doing this is balancing to tax collected and gross sales. This way you're not remitting a penny more or a penny less than you actually collected.
And it's the exempt sales that you're making the changes to.
Ellie Moffat: All right. Thank you so much, Mike. Why don't we
[00:09:00] talk about notice management next?
Michael Fleming: Okay. States are not very efficient. So even if you do everything perfectly, whether you're doing the returns yourself or having a third party do it, there are going to be notices.
And a notice is when a state thinks that they haven't received a tax return or a payment or that the numbers were off or whatever. That's what a notice generally is going to tell you. And if you're doing the returns yourself, you could be looking at a payment confirmation and a state sending you a notice stating that they didn't receive your payment.
Someone's gotta clear that notice. Someone's gotta contact the state and say, Hey, I gotta a payment confirmation here. What do you mean I haven't paid this? So states not always very efficient. Sometimes it's a matter of timing. If you're filing the Colorado locals through this SUTS program in
[00:10:00] Colorado, the state's collecting that money and then giving it to the local jurisdictions.
Problem is local jurisdictions want their money, need their money very quickly. So the day after you know it's due, they're sending you a notice and getting the money from the state three or four days later. They should just slow down the process. Colorado very environmental friendly state, yet they kill more trees than any other state out there.
I just don't understand it. Slow down on the notices, but someone's gotta be managing those notices. Someone's gotta contact the state and say, Hey, we filed through SUTS, here's our proof. They have to be taken care of. Now, if you're doing this yourself, there's three places you want to be checking.
You want to be checking your regular mail, you want to be checking your email, and you want to be checking your online account. Some states do a combination of all three, sometimes
[00:11:00] one month it'll come one way. Another month it'll come another way. In some states just do it online. So if you're not checking your online account, you don't know about these things until it's built up into a big issue.
And every once in a while, the state may be right. Most of the time in my experience unless you know that you filed something late, it's just a timing issue or one hand not knowing what the other hand is doing. So if you're doing it yourself, you would generally be handling this. If you're utilizing a third party, all the software companies are gonna tell you, oh yeah, we got notice management.
Their idea of notice management is notifying you when they get a notice. That's how they're managing the notices. When you come to a company like us, we're going to handle everything. We're actually gonna clear that notice for you, and we're gonna do it complimentary if it's the state's fault or our fault.
The only
[00:12:00] time there would be a fee for it is if you sent us the money late. And it's an actual real notice. Something that has to be collected. So that's caused by you. So therefore there'll be a fee. But if it was caused by us or if it's just general state inefficiencies, that's something we're gonna do on a complimentary basis.
But someone's gotta be doing it. So if the software company says they are doing it. What exactly are they doing? How much participation is required of you? Because if you gotta clear the notices, now you gotta deal with the software company to get all the information. And that's not always an easy process.
Especially with some of these software companies outsourcing everything overseas. It's just a big issue there. Notice management, and it's gonna happen. Don't get upset with your provider if you get a notice because even if you're doing it yourself, you could be getting notices.
The states are just very inefficient.
Ellie Moffat: All right. Thank you so much, Mike. And
[00:13:00] last little bit that we'll touch on here, discrepancies between tax collected and tax remitted.
Michael Fleming: Yeah, this is a real big one and a lot of times, I don't, I hate using stereotypes, but you have your stereotypical accountant or bookkeeper and they wanna make sure that everything matches to the penny and they can't get around things if everything doesn't match up exactly. When it comes to sales tax, that's gonna be a very rare instance, and there's a number of reasons why. Again, when I talked about balancing earlier, that's gonna be one of the reasons because I'm collecting in dollars and cents, but I'm remitting in whole dollars. So right away there's gonna be a difference there between the tax collected and the tax remitted.
Again, when we are balancing, there could be other reasons why the taxes don't match up, but one of the biggest reasons is that states pay you to collect their tax. And it could be
[00:14:00] anywhere between a quarter percent to 5%, and that state may have a limit on it of $25. So it's not a whole lot of money, but it's some money.
So when you have this money that the state's paying you. That means those taxes don't have to be remitted. There's gonna be a difference between the tax collected and the tax remitted. You're gonna have less tax remitted than you actually collected because of these discounts or vendor subsidies.
And going back to the balancing, one of the big issues there is what happens if it's the wrong zip code and it was a difference in rate or something along those lines. So there's gonna be a discrepancy. What we do here is at the beginning of the month, we're gonna send out a funding request based upon your data to you, and it's gonna be based upon the tax collected.
And then when we remit the tax, we're gonna show a column
[00:15:00] that's the tax that's been remitted, and then what the net difference is, and then a reason on why there's a net difference. So that gets sent out at the end of the month. So the beginning of the month, here's all the tax that's collected.
The end of the month, here's all the tax that's remitted, what the difference is, and why there was a difference. And this is invaluable for those stereotypical gotta have all the i's dotted t's crossed, every penny has to match. This helps them get their arms around it and makes it a lot quicker in reconciling the accounts, whether they be bank accounts or bookkeeping entries or whatever you need to be doing. You've gotta somehow account for these differences. That's what we do. But you've gotta have a process that works for you. If you wanna borrow our process, by all means do. I think it's a good process and it has saved us so many headaches. Sometimes, you gotta show
[00:16:00] them that a couple of months in a row and walk them through it each month, but then they get it and now they know what to expect and they know how to use that information to do whatever they need to do. But these are the three big things when it comes to returns. There's a whole bunch of more information.
We actually have a whole webinar that's about doing sales tax returns. So I suggest if you want more information on this, you can either contact us or you can go and watch one of our webinars that actually provide for CPE credit. And Ellie can get you some information on that.
Ellie Moffat: Yes. And i'll just to wrap it up here too. I'll just say, if you have other sales tax needs that aren't sales tax returns, we have a lot of solutions and services. We have the live webinars, there's information on our website, and if you have questions or would like to work with us, please reach out to me directly.
My email is E-M-O -F-F-A-T at salestaxandmore.com. That's
[00:17:00] emoffat at salestaxandmore.com. You can also visit our website salestaxandmore.com and reach out to us through that. So thank you so much everyone for being here. Please like and subscribe and back to you Mike.
Michael Fleming: Thank you everyone. I hope that you enjoyed today's episode and we hope to see you on future episodes of the Sales Tax and More Podcast. Bye bye.