Despite the notoriously complex nature of filing sales tax, it’s easy to be lured into a false sense of compliance. Many small businesses relegate sales tax to the back office or the bottom of the to-do list, especially during the busy season. The fact is, it’s a hassle to correctly calculate, collect, remit, and file taxes, plus, dealing with exemption certificates and product taxability changes is often onerous.
But out-of-mind doesn’t mean all is well; it’s more likely to mean out-of-compliance. In fact, some common sales tax mistakes have potentially devastating consequences. When there’s a high volume of sales and a need for speedy fulfillment, staying compliant can be challenging at best.
Ignoring Consumer Use Tax
Consumer use tax is one of the most common causes of miscalculated and unpaid tax. The silent sibling to sales tax, consumer use tax applies to the consumption, use, or storage of tangible personal property (TPP) when sales tax wasn’t collected at checkout, as often happens with catalog or internet sales. It may also be due on items purchased while traveling in another state or country. Businesses also owe use tax when they pull items purchased for resale and use them in-house.
Taxpayers are supposed to remit consumer use tax directly to the tax authorities, but less than 2 percent do. Consequently, states are working to increase consumer use tax compliance. Some are now asking non-collecting remote vendors to identify their customers, so tax departments can ensure these sellers are remitting the use tax they owe.
- Learn the difference between sales tax and consumer use tax
- Review all non-resale purchase invoices and accrue consumer use tax where appropriate
- Properly track and account for withdrawals from resale inventor
Mismanaging Exemption and Resale certificates
Another common mistake many small businesses make when filing sales tax is mismanaging their exemption and resale certificates. Sales tax exemption certificates and resale certificates enable certain consumers to purchase taxable goods and services tax free. Consumers qualifying for an exemption must provide the seller with a valid resale or exemption certificate to prove they’re entitled to it. Without such a certificate, sellers can be held liable for the uncollected tax.
Invalid or lapsed certificates put the seller at risk of non-compliance. It’s therefore critical for companies to have an efficient certificate management system in place, such as automation.
- Create an audit trail for certificates
- Update product and service exemp on rules for every jurisdiction in which you do business
- Be able to quickly generate an exemp on certificate summary report
Applying the Wrong Rates or Boundaries
The third biggest mistake when filing sales tax is failure to track rate, rule, and boundary changes can lead to trouble down the line. There are more than 12,000 sales and use tax jurisdictions in the United States, and according to Avalara tax research, there were 36,254 tax changes in 2017 alone. On top of that, states routinely amend taxability rules for goods and services. Thus, finding accurate information on these changes can be like finding a needle in a haystack.
Of those surveyed, nearly half use state websites and tables and 35% use ZIP codes to find the sales tax rate. —Wakefield Research
- Register in states where you have an obligation to collect tax (nexus)
- Use an automated solution such as Avalara AvaTax to track rate, rule, and boundary changes
Sales tax rates are only part of the equation; states (and some localities) have their own taxability rules for goods and services, and these are subject to change at any time. For example, sweetened beverages are subject to a special tax in Berkeley, Philadelphia, and Vermont; repair, maintenance, and installation services are generally subject to sales tax in North Carolina, but generally exempt in California.
Failure to correctly apply the right rules can be costly. And, as always, the onus to account for these changes is on the business.
- Review all updates to state product and services taxability matrices (generally available on state Department of Reve- nue sites) for all states in which you do business
- Subscribe to individual state “tax change notice” email lists
Filing the Wrong Forms or Paying Taxes Late
Filing and remitting sales tax correctly and on time can be challenging, especially for growing companies doing business in multiple jurisdictions. It can be hard to find the correct form to use in each state, and easy to miss deadlines when filing sales tax. However, late or incorrect tax forms is a red flag to state auditors.
- Assess whether your filing schedule has changed in applicable states
- Review state e-filing and pre-payment requirements
Overlooking Changing Nexus Laws
Ignoring nexus when filing sales tax is risky. While most businesspeople have some concept of nexus — the connection between a business and a taxing jurisdiction on that triggers a sales tax collection and remittance obligation — many don’t realize that nexus laws are complex and subject to change. Numerous states have broadened their nexus laws in recent years. A few now hold that nexus can be established by economic activity alone (e.g., having 200 separate taxable sales transactions or more than $100,000 in taxable sales in a state).
94% of survey respondents have misconceptions around what creates nexus, and 98% of the same are engaged in one or more nexus-creating activities. —Wakefield Research
- Review where you currently have nexus and identify applicable rule changes
- Make sure your business is registered where it needs to be
- Determine whether your business might have unwittingly created nexus
Passively Accepting Negative Audit Findings
Don’t be afraid to challenge negative audit findings. State auditors routinely publish information regarding how to appeal a negative audit finding or contest a final decision. These typically include specific instructions on how to disagree with a final finding.
The average audit costs a company more than $300,000. —Wakefield Research
- Review your rights and responsibilities (on most state audit department websites)
- File a timely appeal
Filing sales tax and remaining compliant can be tricky, especially for growing companies doing business in multiple jurisdictions. Handling it manually is complicated, time consuming, and risky, which means it can inhibit rather than encourage growth.
Half of the survey respondents hadn’t updated their sales tax compliance processes in over six months or couldn’t remember when they were last evaluated. —Wakefield Research
Automating sales tax compliance with Avalara AvaTax gives companies the agility, exibility, and efficiency needed to thrive.
Tax mistakes can be costly and can bring your successful business to a grinding halt. It’s always better not to make errors in the first place.
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.
Navigate rapidly changing rates and rules with advanced tax software that integrates with your existing business applications.