Don’t Get Caught Off Guard by Sales Tax: 9 Things to Check

Today, I want to talk about something important that affects all of us: sales tax. It’s something we might not always think about, but it’s crucial to understand and comply with the rules to avoid any unwelcome surprises.

Now, I know sales tax can be a bit confusing, so I’ve put together a checklist of nine key points to help you stay on top of it all. Let’s dive in and make sure we’re in the clear!

1. Determine Where You Have Nexus

First things first, let’s figure out where your business has nexus. Nexus refers to the connection between your business and a state that triggers a sales tax obligation. It could be based on physical presence, economic activity, or other factors. Knowing where you have nexus will help determine your tax responsibilities.

2. Understand the Sales Tax Rates

Next up, familiarize yourself with the sales tax rates in the states where you do business. Different states have different rates, and some even have local tax rates on top of that. It’s essential to be aware of these rates to charge the correct amount of tax.

3. Keep Track of Exemptions

Now, exemptions can be a bit tricky, but don’t worry—I’ve got your back! Be sure to monitor which products or services are exempt from sales tax in each state. This way, you won’t charge tax on something that doesn’t require it, saving your customers some money.

4. Know the Filing Deadlines

Time is of the essence, my friend. Stay on top of the filing deadlines for each state where you have a sales tax obligation. Missing these deadlines can result in penalties and fines—definitely not what we want! Set up reminders or use technology to help you stay organized.

5. Have a System in Place

To keep everything running smoothly, it’s essential to have a reliable system for tracking your sales tax data. Consider using accounting software or automation tools to streamline the process, making compliance a breeze.

6. Keep Your Records Spotless

Organized record-keeping is crucial when it comes to sales tax. Maintain detailed records of your sales, purchases, and any exemptions claimed. These records will be your best defense if ever audited, ensuring you’re prepared for anything that comes your way.

7. Stay Up to Date

The world of sales tax is constantly evolving, so it’s crucial to stay informed. Keep yourself updated on any changes in tax laws, rates, or reporting requirements. Attend webinars, read industry publications, and consult with professionals to stay ahead of the game.

8. Understand Economic Nexus

Economic nexus is a concept that may affect your sales tax obligations. It means that even without physical presence, your business might be required to collect sales tax based on your level of economic activity in a state. Familiarize yourself with the rules around economic nexus to ensure compliance.

9. Seek Professional Help if Needed

If you’re feeling overwhelmed or uncertain about sales tax compliance, don’t hesitate to reach out for assistance. There are professionals out there who specialize in sales tax and can provide guidance tailored to your specific situation. It’s better to seek help than risk making costly mistakes.

Well, that wraps up our checklist for avoiding sales tax surprises! I hope you found these points helpful and feel more prepared to tackle the world of sales tax. Remember, staying informed and taking the necessary steps to comply with the rules will save you from any unexpected headaches down the line. Take charge and keep those sales tax surprises at bay!

Did you know that there are over 11,000 different areas in the U.S. where sales tax is collected?

For small online businesses, this can be a complete nightmare. Each area has its own rules, rates, and forms to follow.

To help you understand what’s important, I had a phone interview with Chris Livingston from VertexSMB. They provide software to help small and medium-sized businesses automate their sales tax.

According to Livingston, there are nine things you should consider when it comes to sales tax compliance:

Sales Tax Compliance Checklist

1. Know Your Nexus

The most crucial thing to understand is what is meant by your nexus.

How Nexus is Defined

Nexus, or what is commonly referred to as sufficient physical presence, is the fancy term used to figure out if a business that sells stuff in another state is responsible for collecting sales or use tax in that state.

Having nexus is like a signal that tells the government it’s alright for them to charge taxes on a company. So it’s really important for online businesses to know which states they have enough presence in.

It can be kinda tricky to figure out where exactly nexus exists, but not following the rules can end up being super expensive. You might have to deal with audits, pay fines, and even rack up some interest.

What does ‘Physical Presence’ mean?

To have a physical presence nexus means having certain things in place, like an office, employees, a warehouse, affiliates, inventory, or using a third-party vendor to ship products from another state. It’s even possible for something as simple as having a billboard by the highway to be considered a nexus, according to Livingston.

Before ecommerce, knowing your nexus was easy. You had a local store where customers bought products and paid sales tax. But now, things are more complicated. You have to think about where your billboards are located, the states where your salespeople live, and where your inventory is stored.

Click-through and Affiliate Nexus

As ecommerce has grown, many states have created laws like click-through nexus and affiliate nexus to tax online retailers on their sales.

I found some interesting information on the Sales Tax Institute website that I’d like to share with you. It talks about click-through nexus and affiliate nexus legislation. Let me break it down for you in simpler terms!

So, when we say click-through nexus, what we mean is that if you’re a seller who’s selling things remotely, you might be required to meet a certain sales threshold in a particular state. This threshold is based on the activities of someone in that state who’s referring customers to you. Basically, if someone in that state has a website and they refer customers to your website, and you end up making sales because of that, you might be on the hook for sales taxes in that state. Interesting, right?

Now, let’s talk about affiliate nexus legislation. This one is a bit different. It says that if you’re a remote retailer, you might need to have a strong connection with an in-state retailer. It could be that you have a substantial interest in that retailer or you’re actually owned by them. On top of that, you both should be selling similar products under similar names. If all these conditions are met, you might have to deal with sales taxes in that state. Quite a bit to consider, don’t you think?

2. Get Your Sales Tax and Business Licenses

Okay, so now that you know about click-through and affiliate nexus, let’s talk about what happens after you establish nexus. You see, once you’ve met the requirements for nexus, you have to get your hands on sales tax and business licenses. It’s important to comply with these regulations to ensure you’re running your business properly.

Almost every state wants retailers to sign up and get a license to collect sales tax, I say. When sellers decide their store is connected to a specific state, they have to register to collect sales tax for that state.

I explain that each place has its own way of getting a license.

Merchants will need to fill out different forms depending on the place, I say. Some may ask for fingerprints, while others will use the seller’s social security number as identification. Also, since some licenses need to be renewed, merchants have to stay on top of when they need to renew.

3. Find out the Tax Rates

In order to make sure they collect the right amount of sales tax, online businesses have to know the correct tax rates for the states and places where they are connected.

Let me tell you about this interesting example I came across. There was a business that had loading docks on two different streets on opposite sides of their building. The twist was that each street had a different tax rate!

So you can imagine how important it was for the business to always be mindful of which dock they used to off-load their merchandise. They had to be aware of the tax implications of each dock.

4. Know the Rules for Taxing Products

When it comes to selling items, most things are considered tangible personal property (TPP) and are taxed at the regular sales tax rate. But here’s the thing – there are exceptions, as explained by Livingston.

Now, when we talk about product taxability, things can get a bit more complicated. Take heavy machinery, for example. In certain places, it’s considered TPP and subject to tax. But depending on how it’s used, it might be exempt from tax or taxed at a different rate in other areas. So it’s important to understand those special rules.

I want to tell you something interesting that I recently learned. You know how we use software as a service? Well, did you know that for tax purposes, it’s actually considered a service? And depending on where the service is provided, there might be different tax consequences. Pretty cool, right?

5. Know the Difference: Origin and Destination

Now, let’s talk about transactions that happen within the same state, also known as intrastate transactions. There are two types of jurisdictions for these transactions: origin and destination.

Here’s what’s interesting – some states tax based on where the product came from, while others tax based on where it’s going. It’s like a little tax mystery that varies from state to state, according to Livingston.

I want to talk about state taxes, I said. Did you know that different states charge taxes based on where a sale originates or where the invoice lands? For example, if you buy something in Tempe, Arizona, and it gets sent to Scottsdale, you’ll be taxed according to the Tempe tax rate. But in other states like New Jersey and Louisiana, the tax rate is determined by where the invoice lands. It’s not the same everywhere, which can be confusing!

6. Keep Your Exemption Certificates

Here’s something sellers should know: they can give exemption certificates to buyers for a bunch of different reasons. Maybe the buyer wants to resell the item, or maybe they have a 501c3 status, or maybe they’re using the product for manufacturing or farming. But here’s the catch, I said. Sellers have to ask for and keep those certificates on file. It’s like a proof that they don’t have to tax the transaction. But here’s the thing, different rules apply depending on where you are. Buyers should always keep their certificates safe, just in case they get audited.

You know what? I’ll break it down for you, said Livingston. An enterprise zone is this special zone we create to encourage economic growth. It’s like when we make a designated place where businesses can get extra benefits, like building a fancy new mall.

7. Getting the Tax Right

Let’s talk taxes now. There are two types: sales tax and seller’s use tax. They might sound similar, but they’re actually different, so it’s important to know which one you’re dealing with.

Different types of transactions require different types of taxes, Livingston explained. Sales tax is for stuff happening within the state, and it can have its own rate. On the other hand, seller’s use tax is for things going between states, and it might have a different rate.

Now, here’s the deal: when you’re a merchant, you need to charge the right rate based on the type of tax. And when it’s time to pay up, you gotta fill out the right form and make sure you’re remitting the correct tax amount.

Sometimes merchants can use the same form for both tax types, but in certain cases, they may need to use different forms depending on the jurisdiction, I explained. It’s essential that you file your taxes correctly to avoid any penalties or additional charges.

8. Be Aware of the Risks with Returns

There are specific tax returns for sales tax, seller’s use tax, and consumer use tax, I continued. The process of finding, using, and submitting these forms can be overwhelming and full of potential mistakes. Additionally, with electronic filing and payments, there’s even more risk and work involved.

I also want to highlight that if you purchase something from an online retailer without nexus and they didn’t charge you tax, you may be responsible for paying consumer use tax for that purchase.

9. Know What Triggers an Audit

Let’s talk about audits, something that no ecommerce merchant wants but, according to Livingston, will have to go through at some point. So, it’s important for retailers like you to know what can trigger an audit.

There are a few things that can trigger an audit, Livingston explained. For example, if you have a lot of exempt sales, if there are big changes (either increasing or decreasing) in your sales tax, or if you consistently file your taxes late.

Now, I know it’s not something you want to hear, but the truth is, audits are inevitable. As the saying goes, The tax man cometh.

But don’t worry! Livingston suggests that small ecommerce businesses like yours should work with a trusted tax advisor. This advisor can be a CPA or a sales tax expert who will help you better understand the compliance process.

Sales tax compliance is a complex issue, he says. So, it’s a good idea to seek advice from someone who knows what they’re doing. You really want to get help from a trusted advisor.