An end to the sales tax nightmare
In the US, sales tax is critical for almost every business. Of the 50 American states, 48 have a sales tax on items purchased. In addition, 38 states have local surtaxes on top of that state sales tax. This quickly becomes complex – a complexity I remember well in one of my client businesses when I was a practicing accountant.
My client ran a motorcycle dealership. We had to report the local sales tax for the location of each vehicle’s registration (from that of the customer who purchased). That meant we needed to track lots and lots of different local surtaxes, because the surtax was based on where the customer lived, not on where we were selling from. So if the buyer was from out of town, we had to report and pay his (or her) local surtax, not our local surtax.
I remember the process all too well – the calculation could be broken down like this:
- How much in sales do we have from each city where we expect the vehicle will be registered?
- What are the local surtax rates within these cities?
Once we had this research complete, we’d setup a spreadsheet and calculate a rough local sales tax amount that we would collect from customers. Then we’d calculate what we actually owed and make our payments to the various authorities.
Calculating and paying sales tax was difficult because California (like most states) requires the business owner to report the state’s portion of any sales tax separate from the local surtax. There are some useful sites to help research your state and local sales tax rates (such as Avalara or your state sales tax website) but carrying out this process with spreadsheets was time-consuming and stressful because the heavy data entry invited errors – and errors would result in stiff penalties.
Now we don’t need to do a spreadsheet like we did years back. The tax rates feature in Xero allows you to easily setup each component of a state sales tax. Using our example above, I would set the California State Tax as 7.25% as the first component and the San Francisco County Tax of 1.25% as the second component. Together, they equal 8.50%. On your customer invoices, it would read as a sales tax of 8.50% and, when completing an invoice, Xero records the amount to sales tax payable.
Once you have your tax rates and the components setup, you will assign an appropriate tax rate to each of your customers in Xero for whom you must track sales tax.
Reporting is where the rubber meets the road. Without good sales tax reporting from your accounting system the process of creating your state sales tax report can be a nightmare.
When you are ready to complete your state sales tax, use the Xero Sales Tax report and it will provide you with the information needed: gross sales, sales tax, and net sales. Then you can filter into the different tax rates (such as state and local). When you pay your sales tax, simply apply the payment in Xero to sales tax payable, lowering the balance by the payment amount.
So get rid of your spreadsheet, and with it your sales tax nerves. With Xero, you can stay on top of your sales tax collections and report on them easily and confidently.
For more information about sales tax setup and how Xero works for sales tax reporting visit the sales tax page in our Help Center.
Read more about Accountants