As a retailer or other seller of products, you have a lot of details to attend to but one of the most important, often most complex, is your sales and use tax obligations. Sometimes determining sales tax is like peeling an onion; just when you think you have found all the nuances, there is another layer to contend with.
Non-payment of sales and use tax comes with stiff fines, potential jail time, and repayment requirements. Avoiding all that is essential to both your business and your well-being.
Here are some of the most common tax mistakes sellers make with regards to sales tax and how to mitigate your chances of making them yourself.
Consumer Use Tax
Let’s start with this one because it is not something sellers commonly see. In fact, it is one of the most miscalculated and unpaid tax found during audits.
The use tax is a tax on the use of tangible personal property not otherwise subject to sales tax. Use tax is typically owed when someone purchases a product while paying less than the applicable sales tax or paying no sales tax at all. Unless that buyer has an exemption, use tax is owed to the government. Use tax is also due when a product is purchased from outside the state for use within the state when the seller is not registered for, nor collects sales tax in that state.
Use tax in the past has not been the purview of the seller; the buyer owes the use tax. However, state governments are beginning to hold sellers responsible for it when it isn’t paid.
What to Do
- Learn the difference between sales tax and use tax
- Write a use tax policy for your business
- Review all your non-resale purchase invoices and determine consumer use tax where is applicable
- Properly track and account for any withdrawals made from your resale inventory
Missing or Invalid Exemption and Resale Certificates
An exemption certificate allows a purchaser to make tax-free purchases that are otherwise subject to sales tax. Resale certificates should be provided to suppliers and vendors when a product is bought for resale and are therefore sales tax exempt. Certifications can expire or otherwise become invalid.
Whether or not a buyer is allowed tax-free status is up to you to find out. You must make certain the buyer has a legal exemption; otherwise, you could be found liable for uncollected sales tax (see jail time above).
What to Do
- Use automation to track exemption and resale certificates
- Create a solid process to monitor your receipt of certificates and their expiration dates. (Software is a big help in this regard.)
- Lay down an audit trail for the certifications in case you are ever audited
- Keep track of exemptions in each jurisdiction where you do business
- Be able to generate a summary report quickly
Applying the Incorrect Rate, Rule, or Boundary
Did you know there are over 11,000 sales tax jurisdictions in the US? Not only that, but changes occur annually. Wakefield Research ran a survey that showed over 40% of sellers use state websites and tables backed by ZIP codes to keep track of the correct rates.
If you do not keep track of the changes in the jurisdictions in which you operate, you will come up short at filing time.
What to Do
- Register in each of the states where you do business
- Use an automated solution to keep track of rates, rules, and boundary changes
- Pay the taxes to the state requiring them, not to your home state
If you sell in multiple jurisdictions, technology is your best friend. Software applications created specifically for sales can easily monitor rates, rules, and boundaries and flag you when a change is required.
Collecting Sales Tax but Not Remitting It
Don’t. Seriously. Just don’t. Because criminal penalties will ensue and the damage to your business may be irreparable.
What to Do
Remit every cent of sales tax you collect, every time. State tax boards are not up for hearing excuses.
Not Researching Product and Service Taxability
If you do not thoroughly research the taxability of the products and services, you sell you will wind up applying the incorrect tax rate or following the wrong rules. (See Applying the Incorrect Rate, Rule, or Boundary above.)
States change these taxability rules on a regular basis, no this research cannot be performed only once. As a business operator, you are expected to keep up with any and all changes that apply to you.
What to Do
- Perform regular review of all updates to state product and service taxability matrices.
- Look on the state Department of Revenue website for information
- Do this for every state you do business in
Filing the Incorrect Forms and Paying Taxes Late
Yes, taxes are complicated, and it can be hard to identify the correct forms. Unfortunately, this is just the kind of red flag auditors look for.
What to Do
- Review whether the filing schedule has changed for each state in which you operate
- If a state has implemented e-filing or pre-payment requirements, follow them.
- Take time weekly to review your transactions and make sure they are error-free.
If you can remit your forms early, you can minimize the chances of an audit.
Nexus is a tricky concept and is especially so for e-commerce or businesses with multiple locations across the US. You may also be subject to nexus if you use a fulfillment service because state government could contend you are storing inventory there creating a nexus.
Quickly, a nexus is a connection between a business and a tax jurisdiction requiring sales tax collection and remittance. What constitutes a nexus is somewhat vague, but many states are becoming quite aggressive about enforcing it.
The laws and regulations for nexus differ from state to state and are often in flux. Many new laws are making it easier for an e-commerce business to trigger nexus. Some states only consider nexus if a remote seller has a certain number of referrals from in-state affiliates.
What to Do
- Review where you currently have nexus and monitor for rule changes
- Register in states where it is required
- Determine if you are creating nexus when hiring contract labor, attending out of region trade shows, or performing other nexus-creating activities
- Collect sales tax per the state guidelines
As you can see, there are many hoops to jump through when it comes to sales and use tax. Your goal should be to prevent the errors in the first place. If you still make a mistake, fix it immediately by issuing refunds if you have been overcharging and by filing with the appropriate states.
While use tax and nexus can seem obscure, today’s internet based business cannot ignore the advance of state law any more than it can ignore the annual changes in sales tax rates, rules, and jurisdictions.
Be vigilant in identifying the sales and use tax rules for each state where you operate. You would be prudent to consult a tax attorney when in doubt.