It’s always good to know the rules that apply to your ecommerce business before you start selling online, but that doesn’t always happen. To help keep you informed, no matter your situation, here are a few things you should know about sales tax and how they can affect your business:
1. You Need to Know If You Have Nexus
At its most basic level, online sales tax is pretty simple. If the sale is made in a state where your business has a physical presence, you charge sales tax. Things can get much more complex, very quickly, though, depending on what line of business you’re in and where you are “engaged in business”. Every state and local jurisdiction has their own definition of what being engaged in business means.
To best understand nexus, start with the basics and explore further from there if necessary.
2. You Need To Know What Rate To Collect
There are “experts” out there that will advise you to just collect the highest amount allowed within a state in order to protect yourself from insufficiently collecting. Please be clear: This is BAD advice and can get you in a lot of trouble, either from the state you are collecting on behalf of or from your customers.
It can feel overwhelming to try and figure out which rate to collect, especially when you may be located in multiple jurisdictions. Do not feel like you need to recreate the wheel. There are many products in the marketplace that can help you figure out what rates are correct.
As a small business, you may feel like you’re not ready to commit to a product that requires a monthly fee to perform rate lookups. That’s understandable. Keep in mind there are many sites that will provide up to a certain amount for free (Side note: here at Taxify, we provide lots of valuable resources for free, like our glossary and blog to help out anyone who needs to sort this out!) Also, many state revenue sites provide lookup versions for free as part of their services. With just a little bit of searching there is no doubt that you will be able to find a solution or service that will work for you.
3. If You’re Still Not Sure About Sales Tax…You Need To Ask!
Accuracy really is everything when it comes to collecting sales taxes. If you have read some of the others posts on this blog, you’ll realize nexus can be difficult to determine and not all states tax the same products. So, while you are always selling the same products, that doesn’t necessarily mean they are always taxable in the same way. You can spend all the time in the world trying to determine if you should charge sales tax or not, but it’s better to find out for sure.
There are many resources on the Internet that will help you figure out if a state has a published opinion on the taxability of products or if you have nexus in an area and are therefore required to collect and remit tax on behalf of a state. The best thing to do when you are unable to know for sure though is to just contact the Revenue Department of the specific area you need help with. They can walk you through your specific situation and help you determine whether or not you should be collecting tax. Of course, all states will highly “suggest” that you should, but focus on whether or not you are required to collect. And as always, get it in writing. As much as we would like to believe that employees of states should know the right answer, a lot of times it depends on who you talk to. If they provide you with a written statement, you can show that you relied on their direction if an audit were to ever occur.
4. You Need To Register Where You Have Nexus
Once you have determined where you have nexus you’ll need to register to collect for each jurisdiction. Some areas charge a fee. Some don’t. Some will require you to renew every so often. Others won’t. Those are questions you can have addressed at the time of registration.
Most departments will require certain information, no matter where you are applying. So before you contact the Revenue Departments in order to apply, have the following information available:
- Your EIN number assigned to you by the IRS.
- The type of entity you are organized as.
- The names and personal information of your company’s officers/partners.
- The fees that will be due at the time of registration.
Once your application is complete you will be provided with an ID number specific to that license in that jurisdiction. This number will have to be provided each time you file your reports. File these in a safe place. If an audit ever occurs you will have to show that you are legally registered with the jurisdiction that is auditing you.
*Bonus Tip – Anyone who purchases wholesale or is tax-exempt must be licensed accordingly and is required to provide the seller with a copy of their current license. If someone is attempting to provide you with such a license and you are unsure if it is valid you are still able to collect the sales tax. The exempt business can seek a refund with the Revenue Department where the tax will be remitted. So just remember, when in doubt…stay compliant!
5. Audits Can And Do Happen!
Audits can seem improbable. In the past, that was probably true. States have not always had the resources to audit more than necessary. In the past few years though, states have become desperate for revenue and in turn have focused more on audits in order to collect “lost” revenue. And their focus has been less on big businesses and more on small to medium sized ones.
Audits are time consuming, but if you are organized, file accurately and on time, and expect to be audited at least once while you are in business, the time spent on an audit can be greatly reduced. The key area that will be focused on during an audit is rates being collected. If you’ve spent the appropriate time researching points 1 – 4 listed above, this shouldn’t be an issue. As an added bonus, if you automate or use some sort of service, many companies will help you if an audit becomes a reality. They’ll have your records saved for you in one convenient location and will be able to provide documentation as to why you have been collecting specific rates. This sort of information is invaluable when trying to convince an auditor that you have been compliant!
6. For Non-Compliant Businesses, Penalties Add Up
Sales tax collected comes from your customers; penalties come directly out of your pocket. And they add up quickly. Not only are there penalties for reporting late, but many states begin to add penalties in the hundreds of dollars if reports are chronically late.
I have worked with a small brick and mortar hair salon before. The only sales tax reported was on product sold separate of the services. After 4 years, they had only reported around $4,000 in sales taxes, but they rarely reported on time. Over that same 4-year period they had paid more than $1,000 in penalties to one jurisdiction. It doesn’t take too big of a leap to see how reporting late (or incorrectly) in multiple jurisdictions can add up to big penalties that come directly from your revenue. Save that money for growing your business!
7. Automating Is The Best Solution
If you’re concerned that you won’t have the time or resources to spend on reporting sales tax every month or quarter, consider automating the process. Automation takes care of everything for you. Products on the market will not only take care of determining which rates to collect, but will also file the appropriate forms and pay from an account you have designated, to each jurisdiction you have nexus in.
Automation does require a commitment to adding a fixed cost to your monthly budget, but when taken in consideration with how much penalties can add up over time, the cost-benefit is worth it…and it also takes some of the weight of the world off your shoulders. The reality is you didn’t get into business to worry about sales tax. Let someone else worry about it for you!
*Bonus Tip – Keep in mind that sales into other states create revenue, which can also affect your income taxes at the end of the year. In addition to finding a product that will automate your sales tax reporting, establish a solid, working relationship with a CPA that understands your industry in order to file income taxes correctly.
If you spend the time upfront addressing these areas of concern for your ecommerce business, you’ll have less to worry about in the long run and can focus on what it is you are passionate about: running a successful business! Sales tax is not a fun part of being in business, but it is a necessary one. Keep in mind that there is always help available if you know where to look. Hopefully, this post will set you in the right direction to getting to where you want to be. If you still have questions, Contact Us! We’re here to help!