Sales tax management is one of the most common pain points for small business owners and online merchants. It’s time-consuming, confusing, and risky. Most business owners aren’t certain where to begin, don’t have much free time to devote to research, and, as a result, often turn a blind eye to sales tax compliance.
Ignoring sales tax won’t make things better for you. Quite the opposite, actually. Every tax dollar you fail to collect is another dollar you are on the hook for. Small business owners are strongly advised to understand their level of risk and take the necessary steps to achieve sales tax compliance.
Sales Tax Risks
Other than property and income tax, sales tax is the largest source of state tax revenue–one frequently leveraged to fill budget gaps. State governments want their sales tax dollars and don’t take kindly to businesses failing to collect on in-state sales.
As a business owner, you, not your buyers, are responsible for the sales tax associated with the goods and services you are selling. Yes, businesses typically pass this responsibility on to buyers by charging sales tax at the point of sale, but failing that, it’s the seller who will be held accountable by state and local tax authorities.
What this means is, every dollar of sales tax you fail to collect is a dollar you will be held accountable for. If you fail to remit this money, you may also be assessed late fees, collection fees, and interest payments.
When to Start Collecting Sales Tax
If you are running your business by the letter of the law, you are expected to begin collecting sales tax on your first taxable sale. We understand, however, that most business owners are looking for a ‘magic number’. For that, consider the following statement from sales tax expert, Michael Fleming of Peisner Johnson & Company,
“A number we have seen some companies use is $250 a month in taxable sales. This equates to $3000 a year or $12,000 over a 4 year period. The tax on $12,000 in sales would be approximately $960 and you may have an additional 50% or so in fines and penalties which bring your risk into the $1,500 range.”
It’s important to remember the decision to start collecting sales tax is the responsibility of the business owner. It is up to you to decide when to get started.
Where Do I Need to Collect Sales Tax?
Once you have decided to get started collecting sales tax, you will need to identify the states in which you are required to collect sales tax. This depends on a concept known as nexus.
Nexus is defined as “a physical connection to a state or local taxing jurisdiction”. Once nexus has been established, a business is required to collect sales tax on sales to state residents. The most common nexus triggers include the following:
An office in a state
A visited state
Inventory in a state
Remote employees in a state
Steps to Sales Tax Compliance
There are four key steps to managing sales tax properly. The details are specific to your situation are unique to your location, the products or services you are offering, and the maturity and size of your business.
Registration: The first step in establishing sales tax compliance involves registering your business in the states in which you have nexus. Once registered, the state taxing authority will assign you a filing frequency. This is typically monthly, quarterly, or annually. Consider a state sales tax guides if you need help getting started.
Collection: Once you’ve registered for a business license, the next step is to begin collecting sales tax. Every major e-commerce selling platform offers this functionality natively.
Filing: Once you have started collecting sales tax you will need to file a sales tax return based on the filing frequency assigned during registration. Filing a sales tax return involves submitting your sales tax data to state and local tax authorities. With Avalara TrustFile you can automate your ongoing sales tax filing.
Remittance: After you’ve filed your sales tax return, you’re not done! You are still responsible for remitting the sales tax dollars you collected. Think of your company as an agent of the state moving sales tax from the buyer to the government.
Sales tax compliance is a very real concern for any small business owner who is serious about growing their business and planning for long-term success. Failure to collect, file, and remit sales tax in states where you have nexus is a risky path to take. Late payment penalties, collection fees, and interest payments can put your business at risk.