For eCommerce shops in the United States, sales tax used to be very simple. Before regulators took over the industry, eCommerce stores were able to charge no sales tax in states that did not physically exist.
2018 was a complicated year. In South Dakota vs Wayfair, the U.S. Supreme Court ruled each state had the right to set its own sales tax rules for eCommerce stores. Today, 45 states have a state-wide sales tax. Each state has its own unique rules. There are more than 110000 local, county, and city tax jurisdictions. It can be hard to keep track.
Avoid these five sales tax Mistakes
Avoiding the common mistakes below will help you avoid the most complicated aspects of U.S. sales tax compliance. This is a tedious but important part of eCommerce business ownership.
Mistake #1: You don’t realize that sales tax must be collected
Despite it being three years since Wayfair’s ruling, many businesses have not updated their sales tax practices. If this is you, you should talk to a Local Tax consultant to assess your tax liability and create a plan to move forward.
The good news? State departments of revenue are usually more accommodating when you approach them than when they fix the problem themselves.
This scenario is even more common: eCommerce stores must pay sales tax. However, companies mistakenly believe they are exempt due to the products they sell. This is a common error made by digital merchants and SaaS companies.
Technology moves at a slower rate than regulations. For many years, sales tax was primarily focused on tangible items such as televisions and furniture. In the last few years, however, there has been an increase in products with no tangible properties — such as software downloaded from the internet. This software doesn’t have a physical CD-ROM that is subject to tax, so many people used to consider it exempted from sales tax. States have noticed an increase in the sales of these digital goods that aren’t tangible, and they’re trying to change their laws to boost their revenue.
Twenty states currently tax SaaS products (software as a service). A breakdown of the tax rates for SaaS is worth looking at. Are your products in this category? You’ll need to make sure your products are properly categorized by states that distinguish digital goods such as eBooks from software.
Mistake #2: Not tracking your nexus
Nexus is one of the most difficult concepts in sales tax compliance. The threshold at which a state requires that a business collect and remit sales taxes is called nexus. This was primarily physical (a presence of a business in a state), but post-Wayfair states established economic thresholds such as gross sales and transactions.
You will need to be familiar with these thresholds to keep your compliance. Also, track the data for each state to determine where sales tax is due to be collected and remitted. Your business will be responsible for any sales taxes that you collect from customers if your business crosses a threshold without knowing it. It’s not fun, ask these six retailers.
Mistake #3: Unreliable data and reporting
Multi-channel sellers with different data silos make it more difficult to track sales tax compliance. This is especially true if you sell through marketplace facilitators such as Amazon, eBay, Etsy, or Amazon. Many states have laws that require marketplace facilitators to collect sales tax and remit it for you. This means that you are responsible for collecting sales taxes on your website (don’t worry, software such as TaxJar can automate all sales tax processes ), but not as an Amazon third-party seller.
Different states have different rules about whether your sales to these marketplace facilitators count toward the threshold. It can quickly get confusing. A sales tax dashboard will give you a complete picture of all your sales channels, along with what has been collected and what you should collect. This will allow you to save time and make it easier for you to be more strategic in your compliance.
Mistake #4: Misclassifying products and their tax rates
A bagel in New York is exempt from tax as a grocery staple, but once you slice it, the bagel will be taxed at 8.75% for prepared food. Synthetic fur is not taxed in New Jersey. Real fur clothing is considered a luxury and is therefore subject to tax in New Jersey. In Pennsylvania, however, real and synthetic fur are both taxable.
This is because tax codes can be filled with so much nuance. Every state has its definitions and parameters. It is important to understand how your products are classified by each state. Although sales tax software can automate these classifications your company may have products that are open to interpretation regarding their taxability, it is worth consulting a professional in tax.
Mistake #5: Missing filing deadlines
Filing deadlines are different in every state. For many states, the filing dates may change depending on how large your company is. The more income your business generates, the more often states will ask you to file taxes.
Depending on the state and company size, there are three filing deadlines: monthly, quarterly, and yearly. Most states require that taxpayers file their taxes by the 20th of each month following the end of the taxable period. However, some states require that sales taxpayers file their returns by the end of the month following the end of the taxable period. A few states require that businesses file their returns by the 23rd or 15th of each month. You should pay close attention to the filing deadlines of states where you have a nexus.
Automate compliance to save time and reduce errors
There’s good news if all this sounds overwhelming. TaxJar, a sales tax software, can automate a lot of processes. This includes the hard part of compliance with sales tax, such as real-time calculations and aggregated reporting from all your channels. An automated solution that tracks your nexus status will alert you when you are approaching the threshold. It will keep track of all those annoying moving filing dates.
Now is the right time to take action if you are concerned about your compliance. To discuss your situation and to create a plan, schedule a meeting with a SALT advisor. They can assist you in navigating the next steps to avoid penalties and fines if you have not been collecting sales tax.
Automating sales tax is something you should seriously consider. This will allow you to save a lot of time and reduce the chance of errors. We are all humans, after all.