# 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.

Dozens of motorcycles, all bound for different destinations.

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.

Robbie Dellow
12 September 2012 #

As a shareholder I’m very pleased to see a USA customer discovering the country-specific benefits Xero offers. Traction within USA is going to be an extremely exciting development and people like Michael will only help the cause.

Martin
12 September 2012 #

American sales tax is the bane of the tourist’s life too. I remember choosing a camera based on a price then getting the sales tax bunged on top. “That’s not what the sticker says!”, “It’s not for me, it’s for the government”. It’s still coming out of my pocket buddy, I don’t care who it goes to.

Then I see 99c coffee at Dunkin Donuts and get out my dollar note, only to be told it’s actually \$1.05 because of sales tax. Cue digging into pockets and bags for a 5c coin. Aargh!

I’ve never understood how Americans cope with seeing and paying two completely different prices.

WSI
17 September 2012 #

Sounds like a frickin’ nightmare. And I thought a couple of different VAT rates and a handful of exemptions were bad here in the UK!

Alexandra Grey
10 October 2012 #

Tax collection is done to keep the government implementing its many different projects. Without it, the country’s economy cannot be sustained. But sometimes tax can be hurting. When tax is imposed to sales, automatic it can be added up to the retail price of the item and it can hurt many pockets.

Susan Jaeger
15 August 2014 #

Michael – Great article. You are absolutely right ! U.S. sales tax is a nightmare for small-medium businesses. Are you aware of any Xero partners who are particularly active in this area – and providing sales tax support on a national basis?