Many companies set up a process to collect sales tax, then assume their job is done until it's time to file and remit. Unfortunately, if your business simply files your tax forms and sends payment without doing an additional accounting task, you're exposing yourself to significant risk.
That accounting task is called sales tax reconciliation. It involves reviewing sales records, accounting data, and tax returns to confirm there's no mismatch between tax you collect and the tax you report and remit.
Sales tax reconciliation is an internal accuracy check that's part of your due diligence. You don't usually have to send the state the data but it's critical to reducing the likelihood you'll owe back taxes and face serious penalties that can result if an auditor uncovers under or overpayments.
This guide explains how reconciliation works, and when states require it. It also offers a step-by-step guide to sales tax reconciliation, and offers tips on what to do if the numbers don't align.
What is sales tax reconciliation?
Sales tax reconciliation is the process of comparing multiple different sales tax records to ensure that the numbers align across all sources.
For most companies, this is an internal monthly accounting process, but in Hawaii and Michigan, annual reconciliation filings are required.
Typically, the reconciliation process includes comparing:
- Data from where your sales are recorded, such as your Point of Sale system, invoicing system, sales platform or storefront
- Data from your accounting software such as QuickBooks or Xero
- The actual tax returns you filed or plan to file
While you're not required to complete this process, or submit evidence of reconciliation in most jurisdictions, reconciling sales taxes can save you from expensive mistakes.
If your accounting or sales records show you collected $4,800 in sales tax but your returns report just $4,400, you've under-remitted. If an auditor spots the discrepancy, you may owe back taxes, penalties and interest, and even face possible criminal charges and reputational damage.
[blog-post-inline-cta]
Monthly vs. annual sales tax reconciliation
While internal sales tax reconciliation is optional, Hawaii and Michigan require annual reconciliation. It's important to understand both processes, and the differences between them.
Internal reconciliation (ongoing)
Internal reconciliation is the routine accounting practice companies do to ensure they're reporting the correct amount of sales tax. This is the process described above, that involves comparing your sales data, accounting data, and remittance.
Most companies should do this process monthly—or quarterly at a minimum—if they don't have a large volume of sales. Your company can set its schedule based on your filing requirements in each state. If you're required to file monthly, monthly reconciliation makes sense.
Your internal reconciliation process should be completed before sales tax filings are due in any state—typically between the 15th and the end of the month—so you can fix any discrepancies before you file tax forms with errors or remit the incorrect payment amount.
Every business with physical or economic nexus in at least one state should voluntarily opt into this process to avoid consequences that could result from submitting inaccurate forms and incorrect tax payments.
State-mandated annual reconciliation
In two states, reconciliation is not optional and is not just a bookkeeping exercise. Both Hawaii (which charges a general excise tax instead of sales tax) and Michigan require a formal annual reconciliation return in addition to routine monthly, quarterly, or annual filings.
If you have nexus in these states, you must submit Form 5081 in Michigan and/or Form G-49 in Hawaii.
Michigan sales tax reconciliation
Michigan requires you to file Form 5081 by February 28 of the year after the tax year. So, the 2025 form would have been due February 28, 2026.
The form is required for all registered companies that withhold income tax and/or that collect sales or use tax, regardless of whether they file monthly, quarterly or annual. It must include:
- Total sales tax collected and owed
- Total withholding from employees
The form's purpose is to provide the state with comprehensive details about your tax liabilities on one convenient document. It reconciles monthly or quarterly sales tax, use tax, and withholding returns (Form 5080) that you submitted during the year.
While Form 5080 includes only the total amounts for different taxes, Form 5081 requires you to provide a breakdown of specific deductions or exemptions you claimed.
You'll also need to compare the amounts on the annual form to the amounts on the monthly and/or quarterly forms filed. If you underpaid, you'll owe the state the remaining balance. If you overpaid earlier in the year, you can request a refund or a credit.
Hawaii sales tax reconciliation
Form G-49 in Hawaii must be submitted on the 20th day of the fourth month after the close of your tax year. If you are a standard calendar year filer, your form would be due April 20.
In Hawaii, you use Form G-45 to file monthly, quarterly, or semi-annual returns. Form G-49 summarizes all of those returns and reports total gross income and total annual liability so you can determine if you've paid the correct amount, owe additional tax, or are entitled to a refund.
Form G-49 can also be used to calculate and claim deductions that are easier to calculate annually or that are not practical to include on your periodic returns, and it ensures your final tax liability for the year is accurate.
How to reconcile sales tax: a step-by-step process
This step-by-step guide explains how to reconcile sales tax so your company can complete this critical task.
1) Pull your reports
The first step is to gather the data you need including:
- Sales data from your POS system, invoicing software, ecommerce platform, billing tools, or wherever it's recorded. If you have multiple sales channels, pull reports from each.
- Your sales tax payable balance obtained from your account software, such as QuickBooks or Xero.
- Data on the amount you'll remit to each state. This should be obtained from your tax software, or your tax return if you have prepared one already.
2) Compare the numbers
Next, compare the numbers from all three data sources:
- Total tax collected: This should come from your sales data.
- Total tax recorded: This should come from your accounting software.
- Total tax remitted/scheduled to remit: This should come from your tax software or return.
To compare these numbers at a glance, create a table with columns showing the tax collected, recorded, and remitted from each of your different sources. Include rows for each state or jurisdiction where tax was collected.
All three of the numbers above (tax collected, remitted, and recorded) should be the same, but they rarely are. Review your table to spot any discrepancies and flag any line on your sheet where the numbers diverge so you can investigate why the numbers don't match.
3) Identify and categorize discrepancies
Once you've flagged any discrepancies, you must find an explanation for the differences. Most discrepancies result from:
- Timing differences: For example, a refund processed after filing or a transaction that was posted late.
- Rate errors: The wrong rate was charged due to issues like incorrect product classification.
- Platform errors: Your ecommerce platform or system didn't work properly or was wrongly configured.
- Bookkeeping errors: Data entry mistakes, missing or duplicated entries, and incorrect account mapping could all lead to divergent numbers.
Once you know the issue, you can identify what fixes, if any, must be applied to reconcile your numbers and feel confident you're remitting the correct tax.
4) Resolve before filing
The purpose of reconciliation is to catch errors before they turn into audit penalties. So, when you spot discrepancies, you'll need to resolve them before filing. This could involve:
- Correcting bookkeeping errors in your accounting software.
- Documenting timing differences so you account for them in the next reconciliation.
- Updating your tax settings in your POS, billing system, sales platform, or tax software to correct rate errors.
If you can't resolve a discrepancy before filing, submit the most accurate return possible based on what you can verify, while making sure to document the open issue and revisit it in the next reconciliation cycle.
If you already filed your return with incorrect information and you've discovered the problem—such as incorrect tax rates—you may need to submit an amended return to fix the error.
5) Archive your reconciliation
Finally, at the close of the reconciliation process, save the completed reconciliation in an accessible format. Include:
- The reports you obtained
- Your comparison table
- Notes on any discrepancies you found
- Information on how you resolved discrepancies
Maintaining an accessible record of your reconciliations allows you to revisit past work to better understand future issues. Having documentation of your reconciliation can also show you performed due diligence in case of a future audit.
[blog-post-inline-cta]
Common discrepancies and what causes them
As mentioned above, discrepancies are very normal during sales tax reconciliation, especially early on in your compliance setup. In fact, the reason reconciliation is recommended is because of how frequently issues are found that can be corrected.
Developing a deeper understanding of common causes of discrepancies allows you to easily identify and resolve errors during sales tax reconciliation. Here are some of the most common issues:
Rate errors
If the wrong tax rate is applied, you'll collect and/or remit the wrong amount of tax. Unfortunately, rate errors are common, especially if:
- Rates have changed recently
- Your platform defaults to the wrong location
- The state's tax situation is especially complex, such as in locations like Colorado or Louisiana where there are separate state and local tax rates
Reviewing transaction-level details, rather than just total sales and tax collected, helps you identify rate errors, while adjusting the settings of your tax calculation tools prevents these errors going forward.
Misclassified products
Product misclassification is another common issue discovered during reconciliation. Examples include:
- Exempt items being taxed (or taxable items being treated as exempt) because a product or service wasn't classified correctly. For example, if candy is taxable but food isn't, food that's incorrectly misclassified as candy will be improperly taxed.
- Variations in state rules: Exemptions vary by state. For example, clothing, food and groceries, SaaS subscriptions, manufacturing materials, and professional services are sometimes taxable in one state but not others.
Classification errors are especially common if your product catalog contains items that are difficult to categorize or that are taxable in some locations but not others.
To identify product misclassification, spot-check product or services against state taxability rules and use the most accurate tax calculation engine possible, especially in complex situations.
Refunds and credits not accounted for
If you processed a customer return in a different time period than the original sale, this may create a discrepancy during sales tax reconciliation, especially if your accounting software and tax return don't treat timing the same way.
Separately tracking refunds and credits in your reconciliation tables allows you to identify and address this issue.
Multi-platform mismatches
Selling across multiple platforms makes reconciliation challenging, especially if some of the platforms are marketplace facilitators that take responsibility for collecting and remitting tax on your behalf.
For example, Amazon is a marketplace facilitator so it collects tax on sales you make on Amazon. While your accounting software shouldn't show that your company personally collected tax on these sales, it may incorrectly show this if it's not configured properly.
This issue is common when sellers who use Shopify move onto Amazon marketplace, as the new inflow of older data may confuse older accounting configurations. It's also an issue because you still must record data on marketplace sales as they often count for establishing nexus.
Timing differences from tax software recalculations
When a platform recalculates tax after the sale has been finalized, there may be a discrepancy between the amount you originally collected at checkout and the amount the platform eventually determines that you owe.
Some sales tax platforms recalculate the tax due on a transaction after a sale is complete. This could occur if the platform must adjust for updated rates, sourcing corrections, or exemptions. It's an especially common issue with SST-registered providers because:
- SST-certified providers often file and remit tax on your behalf and assume liability for calculation accuracy. This incentivizes them to recalculate tax after a sale to ensure the most updated rules apply and the filings are accurate.
- The Streamlined Sales Tax system has uniform definitions and precise sourcing rules that can result in certified service providers re-evaluating address validation or applying rule changes retroactively
- Many SST providers prepare returns with computer datasets, not just a sum of the total amount you collected.
- SST providers sometimes aggregate transactions and apply corrections to batches of transactions prior to filing.
- SST providers are typically paid not by you, but by the state, so state-level accuracy and compliance is likely their highest priority.
Sales tax reconciliation for multi-channel sellers
If you are a multi-channel seller, this makes the reconciliation process much more complex because some of your channels (marketplace facilitators) must collect and remit taxes on your behalf while others don't.
The table below shows how some of the most common ecommerce platforms manage sales tax collection:
All 45 states with sales tax have marketplace facilitator laws that make platforms responsible for sales tax collection and remittance if they play an integral role in facilitating sales. When any of your goods are sold by a marketplace facilitator, you should not remit that tax again.
If it is incorrectly included in your accounting software, or on your returns, this is an error you must catch during reconciliation to avoid double taxation.
However, while you don't want to include this tax in your remittance, you do need to track marketplace sales because many states count them when determining if you've met the economic nexus threshold even though you don't pay tax on these sales directly.
Developing a system for separate tracking is critical so you can accurately monitor nexus and ensure you don't pay sales tax on transactions the marketplace already covered.
If you don't sell on marketplaces, this isn't directly relevant to you—but it still shows the importance of understanding what tax is collected (and by whom) on every transaction.
How Numeral can help you manage sales tax reconciliation
Reconciliation is important because sales tax data lives across multiple systems, including those where you record sales, manage accounting, and file and remit taxes. These systems rarely work seamlessly together.
Numeral provides an alternative in the form of a seamless system that supports tax compliance for ecommerce businesses, SaaS companies, and any companies obligated to collect and remit sales tax.
Numeral centralizes the tax workflow, offering end-to-end support and solutions for every compliance step. Services include:
- Connecting to your sales systems and automatically obtaining transaction data to eliminate the manual data-gathering step of reconciliation.
- Free nexus monitoring across 50 states so you'll know when you're close to establishing nexus and can be proactive in registering for sales tax in the relevant state.
- Auto-registering you in states where you establish nexus.
- Preparing and filing state tax returns, all of which are reviewed by a tax expert to reduce the risk of rate errors and classification mistakes that make reconciliation challenging
- Maintaining a complete filing history in its dashboard, so your company has a clean record of what was filed and remitted in each state. This record can be useful both for internal reconciliation and for audit defense
- Managing a virtual mailbox for state tax notices, so if a state sends a discrepancy notice, we can respond promptly and resolve the issue so you don't have to
Best of all, our services are all backed by the Numeral Guarantee. If a filing is missed due to an error on Numeral's part, Numeral covers resulting penalties and interest
To find out more about how Numeral can make all aspects of sales tax compliance simpler, including the reconciliation process, book a demo today.
[blog-post-inline-cta]
Sales tax reconciliation FAQs
What is the difference between sales tax reconciliation and sales tax filing?
Sales tax filing involves submitting tax returns to the state. It's not optional if you have economic or physical nexus in a state. When you file, you also remit payment. Reconciliation is an optional internal accuracy check completed before filing to confirm you're reporting the correct tax.
How often should I reconcile my sales tax?
If you file and remit taxes monthly, you should reconcile your sales tax monthly—ideally in the first week of the month before any filing deadlines.
If you file quarterly or biannually, you can reconcile your sales tax less often but don't want to wait too long or identifying the cause of discrepancies becomes harder.
Which states require annual sales tax reconciliation?
The majority of states don't require reconciliation, but it is instead an optional best practice to do your due diligence. There are two exceptions: Michigan and Hawaii.
Michigan
Michigan requires you to file an annual reconciliation using Form 5081 by February 28 of the year after the tax year closes. It reconciles monthly or quarterly taxes reported on Form 5080 throughout the year, and includes a more in-depth breakdown of deductions.
Hawaii
Hawaii requires you to file an annual reconciliation using Form G-49 in Hawaii by the 20th day of the fourth month after the close of your tax year. This reconciles monthly, quarterly, or semi-annual taxes reported on Form G-45 during the year.
What should I do if my sales tax numbers don't match?
If your sales tax numbers from your point of sale system, accounting system, and tax return don't match, you should try to identify the error during reconciliation before submitting your form.
Start by identifying what source of data has the discrepancy. Then, carefully review your data for signs of common errors such as rate errors, timing differences, or bookkeeping mistakes. Correct any issues and amend your returns if you filed with incorrect information.
Does Amazon handle sales tax reconciliation for sellers?
Amazon is classified as a marketplace facilitator. This means Amazon handles sales tax collections and remittance for on-platform sales. That's the extent of its responsibility for your sales tax compliance. Amazon doesn't reconcile your full multi-channel tax data.
Although Amazon pays taxes on platform sales, you still must keep track of those sales. In many states, sales on a marketplace facilitator's site still count in determining if a business has sufficient economic connections with a state to establish nexus.
Can I use QuickBooks or Xero to reconcile sales tax?
QuickBooks and Xero both offer built-in tools that allow you to calculate, track and reconcile sales tax liabilities. These tools allow you to match payments to your bank account feed and ensure your liability aligns with the payments you made.
However, you also must compare your data in QuickBooks and Xero with your actual tax returns and with data from your sales platforms to ensure all the numbers match. Discrepancies may result from integration issues rather than errors, so carefully review the numbers.
[blog-post-inline-cta]
