Sales tax compliance is something that is often pushed aside to the last minute—truthfully, it’s one of the least fun parts of running an eCommerce business, but – just like flossing – if you deal with it now you can avoid a whole lot of pain later on. To help in this effort we’ve put together this guide to make sure you’re following the current rules and regulations for all states where you have sales tax nexus. Think of it as your annual sales tax wellness exam.
The Importance of Sales Tax Compliance
It can seem overwhelming, but from our experience helping thousands of online sellers, we’ve found that the hardest part of sales tax compliance is getting started.
You’ll find that taking a few minutes right now will help you avoid common mistakes such as:
– Collecting without a permit – Many states consider it unlawful to collect sales taxes without first registering for a permit from the state.
– Collecting the wrong amount of sales tax – Collecting too much sales tax make your customers happy, but not collecting enough tax means that you might end up having to make up the difference yourself – out of your profits. Ouch!
– Not keeping up with sales tax law and rate updates – Rates and laws change from time to time. It’s a good idea to keep up with the changes in tax code for every state where you’re required to collect sales tax.
Why Compliance can be Tough
There are a lot of variables involved with sales tax compliance, enough that it can become quickly overwhelming to any of us who do not possess a degree in accounting. Here are some of the factors that make compliance complicated:
– Tax rates and due dates vary by state. Some states will have a single flat sales tax rate, but most will vary from one municipality to the next. Each state can also have a different sales tax due date as well, so you may have to file monthly, quarterly, or annually.
– Sales tax compliance is governed at the state level. Every one of the 45 states (plus the District of Columbia) that collect sales tax have rules that differ from each of the other states. Sometimes the rates are charged based on the destination address and sometimes the rates are due to the origin address, and some states require that you charge sales tax on shipping. It’s really all over the place.
– Not all items are taxable. Many items sold in the United States are taxable, but that isn’t always the case. For example, some states charge a lower sales tax rate (or none at all) on groceries, and other states do not charge sales tax on clothing purchases.
When to Give Your Business a Sales Tax Check Up
If you’re already collecting sales tax, you may be in “set it and forget it mode.” But we recommend double checking your sales tax liability if you’ve made any of these common businesses changes recently:
- You started selling on a new channel – Maybe you just started doing Amazon FBA or opened up a Shopify store. No matter where you’re selling, if you opened up a new sales channel it’s time be sure you’re collecting and reporting sales tax correctly now that your business has changed.
- You opened a new location – In most states, each physical location requires a sales tax registration. If you’ve cut the ribbon on a new store, make sure the state knows about that, too.
- You made a fundamental change to your business – Whether it’s as big as adding a new business partner or transforming from a tiny LLC to an S-Corp, or as small as changing your mailing address, be sure to update your sales tax permit with the state if you make a change to your business.
- You hired an out-of-state employee – Today it’s easier than ever to hire a remote employee to manage your website or provide customer service to your buyers. But employees in new states can affect where you are required to collect sales tax, too.
- You entered into a drop-shipping relationship – Drop-shipping is one of the most complex relationships in sales tax. If you entered into a new drop shipping relationship, chances are you’ll need to negotiate sales tax, and you may even find yourself collecting sales tax in a new state.
- You sold at physical location in a new state (even temporarily) – If you sold your products at a trade show or craft fair, even for a few days, you may have sales tax nexus in a new state.
As your company grows and changes, so does your sales tax compliance. Fortunately, a sales tax check up takes about as long as a regular doctor’s visit.
TaxJar’s Five Step Sales Tax Compliance Check Up
Follow these five major steps to check the health of your business’ sales tax compliance:
- Check your sales tax nexus states. You’ll always have nexus (significant presence) in your home state, but you may have it in additional states if you’ve hired an employee in that state, keep your merchandise in a warehouse in a state, or travel to that state to sell at a trade show. Here’s a handy guide to determine each state’s criteria for creating nexus.
- Review your sales tax permits. If you have nexus in a new state, make sure that you register for a sales tax permit in that state as soon as possible.
You may also find that you no longer have nexus in a state anymore—if that’s the case you can contact your state’s taxing authority to cancel any sales tax permits you no longer need. Some states may require you to keep filing for a while after you cancel, so make sure you check the regulations for that state to see if you’ll have “trailing nexus” there before you file your last return.
- Review or change your filing frequency. You will be assigned a particular filing duration when you receive your sales tax permit, but many states will afterward send a notice that your filing frequency has been changed. It’s a good idea to check all communications from state taxing authorities to see if this happens—you don’t want to miss a filing deadline.
Many states will allow you to change your filing frequency when asked. Most sellers prefer to file less often, and a phone call or email could save you a lot of work if the state will accept your request to change the duration.
- Check for changes to sales tax rates. State and local sales tax rules and rates are subject to change at any time. Fortunately, most online platforms keep track of these changes for you. But if you are collecting any custom rates, you should keep an eye on rate changes. Most rate changes happen in January, July, or October, but if you’re curious you can always double-check a sales tax rate by entering the ZIP code into TaxJar’s Sales Tax Calculator.
- Make sure you’re collecting tax on all of your sales channels. This is probably the biggest mistake we see—seller’s who neglect to make sure all of their sales channels are collecting taxes for all of the states where they have nexus. Let’s say you have nexus in South Carolina because you stock your merchandise in an Amazon warehouse there. This means that you’ll have to collect South Carolina sales tax for purchases made on eBay or on your shopping carts as well as on Amazon. This also means when you no longer have nexus in a state that you go through all of your channels and make sure you’re no longer collecting from buyers in that state.
And if you made it to the end of your checkup, congratulations! Treat yourself to a lollipop.
Sales tax is complex and is never what you’d call fun. New eCommerce business owners will spend a lot of time getting up to speed and even experience sellers need a helping hand from time to time. If you need any help with sales tax compliance or wish to see how an automation solution can save you time and money!
TaxJar is a service that makes sales tax reporting and filing simple for more than 7,000 businesses. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
The following blog was written by Jennifer Dunn of TaxJar