Sales tax for business owners is undoubtedly one of the most complex and specialized aspects of running a small business. With each state and locality having its own set of laws, tax rates, timetables, and exemptions, dealing with sales tax can be overwhelming and frustrating. And as online sales continue to surge, the complexities have only increased.
But please don’t let that scare you away—it’s essential to understand the basics!
What is sales tax?
Sales tax is a point-of-purchase tax paid by consumers who buy certain goods and services (including cash transactions, credit sales, installment sales, layaway sales, and sales involving trade-ins or exchanges of property) within the borders of the taxing authority. In the United States, the authority can be the state, or sometimes a county, city, or township. While buyers bear the financial burden, sellers are responsible for collecting sales tax and remitting the funds to the correct government agency.
The sticky truth: There is simply no one-size-fits-all approach to sales tax
The rub to remember is that there’s no such thing as a one-size-fits-all approach when it comes to sales tax.
If you’re a small business owner trying to wrap your head around this topic, you can get started by looking into some basics:
- Understand the specific requirements in each state and locality
- Determine whether your business has nexus in the states in which you operate
- Know which products are taxable. If goods are being sold for resale, they may require a valid resale certificate
- Register with the relevant state’s taxing agency before collecting any tax
It’s shockingly easy to get into a state
Each state has its own sales tax rules and rates that businesses need to be aware of, and there are many sales tax oddities that make interstate commerce confusing. To determine your sales tax nexus, you must assess your physical presence, affiliates, remote employees, and other business-related activities in each state. You must then register for a sales tax permit and familiarize yourself with the specific tax rates for different products and services.
Oh boy, online sales tax…
If you run a business that sells products online, you’re (hopefully) aware that you need to collect state sales tax from your customers and remit it to your state regularly. But knowing which states require you to remit sales tax has become a complex and confusing issue. Understanding each state’s definition of economic nexus is essential to determine if sales tax should be collected and remitted for sales made in that state. Online marketplaces may collect sales tax on behalf of sellers, but sellers should still be aware of their individual sales and use tax obligations.
You may also be interested in: 4 Essential Apps for Ecommerce and Online Sellers
Remember to keep accurate records
Keeping accurate records of sales tax collected on invoices and filing returns by the set due dates are critical steps in the process. Even if you didn’t collect any sales tax during a specific period, some states may still require you to file a return. Failure to do so can result in penalties or even the revocation of a sales tax license.
While requirements vary from state to state, all will want records of the tax collections your business has made in some form. Know what your state and local requirements are for reporting. Some may ask for receipts from each sale. Your state will also have a schedule for reporting the sales tax your business has collected and how the reporting must be done. Like everything else regarding sales taxes, this (of course) varies from state to state.
Xero and Avalara are in the process of teaming up to help simplify sales tax for small businesses and their advisors. The solution will provide accountants, bookkeepers, and small businesses with a new sales tax automation solution that directly brings advanced sales tax workflows and management into the Xero platform, enabling advisors and business owners to automate sales tax calculations, reporting, and filing. At Financial Solution Advisors, we recommend Avalara as the app of choice for knowing percentages by county and plugging them into Xero.
You may also be interested in: Small business tax: Tips for a stress-free tax season
Compliance pitfalls abound with sales tax for business owners
It’s crucial for small business owners to thoroughly understand their tax obligations to avoid potential penalties or legal consequences. Falling behind on sales tax legislative updates, being unable to break down tax rates as required by taxing jurisdictions, and neglecting to collect tax where nexus exists are common stumbling blocks. Staying up-to-date and in compliance is critical to the long-term viability of your business.
Partner with an expert to stay compliant with state sales tax laws
As companies become more mobile and broaden their customer base, interstate taxes become more problematic for small businesses. We strongly recommend all businesses partner with a professional to ensure they stay compliant with state tax regulations. Not only are the variances from state to state a lot for any one retailer to keep up with, but the risks of non-compliance are significant.
We file taxes for clients in all 50 states and can advise on your sales tax strategy. We can also help you partner with Avalara to complete your sales tax filings. Contact us today to learn more.