Sales and Use Tax

There is no federal sales tax. Sales and use tax is a state and local tax, and the rules for what is taxable, who must collect and how often to file are set by each state. A seller who gets this wrong usually finds out through a state audit that reaches back several years, and the tax a seller failed to collect generally becomes the seller's own bill. Our sales and use tax service helps retailers, restaurants, online sellers, wholesalers and service businesses register where they must, collect correctly and file on time.

What sales and use tax covers

Sales tax is charged to the customer on taxable retail sales and sent to the state. Use tax is the companion tax: if you buy a taxable item for your own use and the seller did not charge tax, the state expects you to report it. Businesses often owe use tax on equipment, supplies and software bought from out-of-state vendors.

What is taxable varies. Groceries, clothing, prepared food, software, subscriptions, digital goods, shipping charges and services are treated differently from state to state, and sometimes from city to city. Many states layer local rates on top of the state rate, and in some the rate depends on the delivery address. Online marketplaces are required by many states to collect on behalf of the sellers who use them, but that does not always remove the seller's own registration or reporting duties.

Who needs it

• Online sellers and subscription businesses that ship or serve customers across the country. See ecommerce and online sellers.
• Restaurants and retailers whose point-of-sale settings drive the tax they report. See restaurants and retail.
• Convenience stores, gas stations and motels with fuel, tobacco, lodging and mixed taxable and exempt sales. See convenience stores, gas stations and motels.
• Wholesalers and manufacturers who rely on resale and exemption certificates.
• Contractors who buy materials, and owners of businesses that are expanding into new states.

Nexus and registration

Nexus is the connection that obligates you to collect. Physical presence is still enough: an employee, an office, a store, or inventory stored in a warehouse or fulfillment center. Beyond that, most states set an economic threshold, measured by dollars of sales into the state and, in some, by the number of transactions. Thresholds and measuring periods vary, so we test each state against your own sales data rather than rely on a rule of thumb.

About two dozen states participate in the Streamlined Sales Tax agreement, which standardizes some definitions and offers tools for sellers. The agreement does not remove the need to register in each state. Registration generally comes first: most states do not want you to collect tax until you hold a permit. Our guide on sales tax nexus covers the concept in more detail.

How an engagement works

1. Consultation. We learn what you sell, where your customers and inventory are, and how you currently handle tax.
2. Written engagement agreement. Scope, states, deliverables and how fees are determined are set out before any work starts.
3. Document collection. Monthly sales reports by state (taxable, non-taxable and shipping), marketplace reports, a list of products and services, customer resale or exemption certificates, existing permits and prior returns, and any notices.
4. Analysis and setup. We review taxability, test nexus, identify the states where you should register, and recommend how to set sales tax in your accounting or sales system.
5. Registration and filing. We prepare registrations and file the returns, using the frequency each state assigns.
6. Review and follow-up. We reconcile the sales tax payable account to the returns, review changes that affect you, and revisit nexus as your sales grow.

Common problems we fix

• Sales tax charged in states where the business is not registered. Many states treat this as a problem, and the amounts held may need to be handled carefully.
• Wrong rates or taxability settings that undercharge customers for months.
• Missing exemption certificates. An auditor can disallow an exempt sale that was not supported by a valid certificate on file.
• Returns not filed once registered. Most states expect a return for every period, even when there were no sales.
• Books that do not match the returns. The sales tax payable balance in the ledger should agree with what was reported and paid. Our bookkeeping service handles that reconciliation.
• Use tax on equipment and supplies that was never reported.

If you are behind

Sellers who find an unregistered state sometimes have choices. Voluntary disclosure programs, including the multistate program the Multistate Tax Commission operates, can limit how many past periods are reviewed and may reduce penalties. Whether one is available depends on the state and on whether the state has already contacted you, so it is best to review the facts before taking any step. If a notice has already arrived, see state tax notices and representation.

How we can help

We work with sellers in Naperville, Aurora and the surrounding area, and with sellers anywhere in the country, in person or remotely. For businesses with obligations in several states we coordinate with our multi-state tax work, and for Illinois-specific questions, see our Illinois page. We do not promise that any state will accept a position or waive a penalty, but we prepare the facts and present them clearly. To begin, contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.