This Sales Tax Administration Checklist will provide you with a list of exactly what to address for sales tax in each potential scenario your business goes through.
Even though sales tax is a part of everyone’s lives, it is often misunderstood. For business owners, this can come at a cost. The Sales Tax Institute and our consulting arm, YETTER Tax, connect with students and clients every day, and we have noticed some common sales tax mistakes companies are making across industries.
In this article, we share the top five mistakes made when dealing with sales tax and ways to avoid them. Keep reading to prevent you and your company from costly sales tax mishaps!
Once you discover you have nexus in a new state and need to start collecting sales tax, you must remember to register with that state before you start collecting. Oftentimes, online selling platforms make it simple to turn on sales tax collection but collecting tax without being registered can lead to major issues. If you fail to register before you begin collecting sales tax, the state may issue you fines, penalties, and interest to pay on top of the sales tax itself. But this costly mistake can be easily avoided! Just be sure to only turn on sales tax collection in your online stores in states where you are registered.
Products (and services) that are subject to sales tax vary across the United States. In fact, it’s common for food, clothing, digital goods, software, and online services to be taxable in one state and nontaxable in another. It all depends on state laws. So, if your product or service is nontaxable in your home state, don’t make assumptions that it will be nontaxable in other states. If you are making online sales, it’s important to consider each state you make sales into because there is a strong chance your products or services are taxable where some of your customers are located. And if the opposite is true (your items are taxable in your home state) don’t assume they are taxable everywhere!
Many businesses use online selling platforms (Amazon, Shopify, BigCommerce, Square, Stripe to name a few) to manage their sales. Online selling platforms make conducting business a lot easier, but it’s important to understand whether the platform you use is taking care of sales tax collection and remittance. Investigate whether the platform is just a sales platform or if it is a marketplace facilitator. Marketplace facilitators are generally required to collect and remit sales tax on behalf of sellers that use their platform. However, if the platform is not considered a marketplace facilitator, then the seller has this responsibility. For example, Shopify is not a marketplace facilitator. Shopify included functionality that allows the seller to collect the tax but that is where their functionality stops! If the online platform you use is not a marketplace facilitator, you are required to file and remit all of the tax collected. Make sure you understand what your sales tax obligations are on every platform before you start making sales.
Using third-party fulfillment services can add sales tax complications for your business. There may be some obligations that you are not aware of. In most states, you are required to register for and collect sales tax if your product is stored in the state – even if you do not have economic nexus. In the Amazon FBA program, products could be stored in any of their one hundred fulfillment centers throughout the country. You can avoid missing requirements by staying aware of where the fulfillment service is storing your products. Additionally, if you are using a 3PL warehouse where you not only own the inventory but also control it, this will be physical presence in the state in almost every state. Physical presence creates not only sales tax nexus but also likely income tax nexus.
Sales tax works is different than other common taxes like income and property tax. April 15th, Tax Day, does not mean anything for sales tax. Sales tax return due dates depend on how much you sell and in which states. Sales tax returns can be filed annually, quarterly, or monthly depending on the state’s rules for filing frequency, which is usually determined by the amount of sales tax collected monthly. It’s important to keep up with filing in order to avoid late fees and interest. Also, the average CPA may not have the sales tax skills to help you. Specific software, accounting firms with a sales tax specialty, and a variety of online resources from trusted sources can help you set off on the right foot with filing sales tax.
If any of these sales tax mistakes have already caused problems for your company or you want to ease your mind by confirming you have covered your basis, reach out to our team of expert trained sales tax consultants to make an appointment.
In the meantime, you can also check out these great resources from our website:
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