Both physical and digital businesses have experienced a broad reach of customers lately. They not only are selling in their home states but also making transactions on the international level for the first time. With this expansion comes new tax obligations to be aware of and comply with. It’s, therefore, essential to know and adhere to taxation rules when experiencing high growth through digital means.
Why do you need to think about eCommerce sales tax?
It’s easy to get tangled in the intricate web of online sales tax regulations. Sales tax laws vary widely from state to state, and local counties and cities may also introduce their own taxes on top of the statewide rate. Not only can the rate change per area, but certain items might be taxed in one region yet untaxed in another. Furthermore, some states may only require you to collect tax once you reach a certain threshold of sales, which can vary from state to state. After determining where you need to register and collect taxes, it is necessary to file and submit the collected funds accordingly.
Managing sales tax compliance can be a daunting task, especially for new eCommerce businesses or those whose websites have grown to the point where they must consider their sales tax strategy. Further complicating matters are potential financial penalties for non-compliance. As retailers experience changes in their business and its size, their sales tax obligations may also shift or expand. We’ve identified six steps all companies should take to ensure your business remains compliant. We also examine how these steps apply to the common challenges retailers face today.
Six dos and don’ts of sales tax compliance
- Do your research.
- Please don’t ignore it.
- Remember exemptions.
- Do collect the right amount.
- Take your time with filing.
- Do use technology to your advantage.
01. Do your research
Depending on your business, it may be simpler than expected to determine your nexus (the place where you must collect tax).
What is your nexus?
Nexus is the link between a seller and a state that necessitates the collection and payment of sales tax on the basis of business activity in a specified jurisdiction. Depending on your operations, confirming nexus can be easy or difficult; if you most often sell to customers within your state and have a small setup, it may not be complex,
but if you make significant sales for delivery across various forms, it can become complicated. Numerous methods exist to create nexus, most of which fit into either physical or economic nexus.
- Physical nexus is established when a business has a physical presence in a state, such as a store or office, and can also be triggered by the presence of off-site employees, warehouses, affiliations, and even participating in trade shows.
- Economic nexus occurs when a business reaches a specific sales volume or number of transactions within a jurisdiction; if this threshold is reached, the company must register and remit sales tax.
02. Don’t ignore it
Avoid the temptation to ignore dealing with taxes, or assume you don’t have to worry about it because you’re petite or don’t sell in certain states. Thinking that way is asking for trouble! If you aren’t collecting sales tax, be ready to explain why otherwise you may face repercussions down the line.
COVID-19 has caused states to become stricter when it comes to collecting sales taxes from sellers. According to The Pew Charitable Trusts, sales taxes generally provide a steady source of income for the state, even in economic slowdowns like the one we are currently experiencing. These taxes represent approximately 33% of total revenue for most states and due to the current situation, states have become more determined to enforce these laws. Therefore, there will likely be more intense oversight of sales tax regulations from now on.
Awareness of the different sales tax regulations and what activities cause each state’s legal obligations is essential. Here are some of the things you need to be aware of.
- Do you offer something that can be touched? This is called “tangible personal property” and is taxable in most states.
- If you’re selling items on a platform or marketplace, there’s a high chance this will be taxed. As of now, over 43 states demand out-of-state sellers to register for, collect and then submit sales tax under economic nexus laws. Businesses that are on eBay or other marketplaces should also be aware of the marketplace facilitator legislation.
- The taxation on services, software-as-a-service, clothing and apparel, installation and labor differs from one state to another.
As your business grows, it is essential to be aware of any potential changes in taxation requirements. Automated tax compliance solutions can save you time and reduce the risk of non-compliance.
03. Remember exemptions
As small businesses expand and offer their services in multiple states, understanding how to collect and submit sales tax can be a difficult task. It can also be just as complicated to figure out when not to collect sales tax, since each state has its own regulations and paperwork for tax exemptions. These exemptions may depend on the item purchased, its intended use, or the buyer’s status.
Here are the three main types of sales tax exemptions
In certain states, grocery items may be free of sales tax. However, there are specific conditions to this exemption; for example, a pre-cooked rotisserie chicken from the deli could be taxable while raw chicken breasts meant for home cooking might be exempt.
Products which are meant to be resold are often exempt from sales tax. This is because the reseller will collect the sales tax when the ultimate buyer buys them.
Nonprofits and government agencies are generally not obligated to pay sales tax. In addition, buyers from states that do not impose a sales tax may be exempt from paying when purchasing items in other states.
Keeping track of exemption and resale certificates can become quite intricate when various states, entities, and elements such as nexus and drop shipments are involved.
If your business still relies on paper-based filing systems, it is crucial to ensure that all certificates are stored correctly. Proper management of exemption certificates necessitates the cooperation of multiple divisions; tax analysts, credit managers, and IT departments have vital roles.
04. Do collect the right amount
Once you are registered in the areas where you must pay taxes, it is time to begin calculating and collecting sales tax. Knowing how much tax to collect is essential; you have to be aware of factors like local regulations, what type of products are taxable, and any applicable holidays. Developing an efficient system for applying the correct tax rate to each transaction is also essential.
Here are three key considerations to make sure you’re collecting the right amount of sales tax
- Accurately determining the tax rate across different tax jurisdictions requires more than just ZIP code-based calculations. This video explains how geolocation technology can help ensure you’re calculating taxes correctly.
- It’s also essential to understand how the taxability of products varies by jurisdiction, as it could significantly affect sales tax rates.
- Make sure you are aware of any sales tax holidays that may be offered by states, as they change from year to year.
05. Don’t flake when it comes to filing
Once registration and sales tax collection is completed, remitting the funds to the relevant authorities is necessary. Each governing body has its own regulations regarding when and how payments should be made (e.g., paper or electronic returns). For example, states such as Illinois and Oklahoma require outlet reporting, meaning businesses with multiple locations must file separate returns for each. This can significantly increase the filing and remittance burden, so paying attention to any outlet reporting requirements is essential.
Make sure you have a clear understanding of the tax filing requirements for each jurisdiction in which you collect taxes and have a strategy for meeting those deadlines. Knowing what sales tax liabilities your business incurs, which forms are necessary to complete, and how to pay can be a tedious task.
Ensure you allocate sufficient resources to manage this process with every filing period. It is essential to be aware of the state-by-state guide for filing and remitting sales taxes. Registering your business in a particular state means you are responsible for collecting its sales tax on permissible transactions and submitting the relevant amount to that jurisdiction.
While this activity may not be enjoyable, it is necessary for adhering to regulations.
06. Do use technology to your advantage
Companies with automated tax compliance solutions are finding that outsourcing is a practical and affordable way to enhance audit response, strengthen customer connections, and diminish the overhead costs of dealing with sales tax. Studies indicate that market frontrunners are three times more likely to automate their sales taxes than those lagging behind. Automation has become the top strategy for achieving effective tax compliance.
The advantages of utilizing automated sales tax services are undeniable. Reports prove that customers of Avalara AvaTax experience: a 58% decrease in time spent on managing sales tax, an avoidance of overpaying by 90%, and successfully passing audits without penalty 50% of the time.
QUESTIONS AND ANSWERS
Q: What are the key considerations when collecting sales tax?
A: Accurately determining the tax rate across different tax jurisdictions, understanding how product taxation varies by jurisdiction, and being aware of any applicable sales tax holidays.
Q: How can geolocation technology help ensure you’re calculating taxes correctly?
A: Geolocation technology can help businesses identify the correct sales tax rate for each customer, no matter where they are located. This helps to ensure that the right amount of taxes is collected.
Q: What should companies know when filing and remitting sales taxes?
A: Companies need to have a clear understanding of the tax filing requirements for each jurisdiction in which they collect taxes and have a strategy for meeting those deadlines. Knowing the state-by-state guide for filing and remitting sales taxes is also essential.
Q: What are the benefits of using automated sales tax services?
A: Automated sales tax services can help to decrease time spent on managing sales tax, avoid overpaying taxes, and help to successfully pass audits without penalty.
Q: How can businesses streamline their sales tax process?
A: Businesses can integrate with Shopiroller in order to streamline their sales tax process and start meeting compliance requirements.
Managing sales tax can be complex, and businesses selling online must pay attention to their obligations. Automating the tax process can help you stay compliant and position your business for success. Streamline your sales tax by integrating with Shopiroller—start meeting your compliance requirements today.