Spring has sprung and it’s time for a tax checkup. Many eCommerce sellers haven’t put much thought into sales tax compliance since they filed in January and some of you may even be first time business owners. Now is the perfect time to check your compliance before getting too far into the year.
Even if you’re a seasoned sales tax compliance warrior, keep in mind that sales tax rules and regulations are always in flux—it’s important to make sure you’re following all of the latest changes in the sales tax code for the states where you have nexus.
Taking a few minutes to make sure all of your taxation ducks are in a row will pay off big time when you have to file your next batch of sales tax returns.
Dealing with sales tax can be stressful, but to be honest the most difficult part is getting started. Once you’ve got the ball rolling downhill, it gets easier pretty quickly.
Take a few minutes right now to help you avoid common sales tax issues, like:
- Collecting the wrong amount of sales tax – Collecting too much sales tax can make your customers unhappy, but if you don’t collect enough you can end up having to pay out of pocket for the difference.
- Collecting taxes without a permit – Most states consider it unlawful to collect sales taxes without having a valid permit, so even if you have the right intentions, hold off on collecting sales tax from your customers until you have your permit in had.
- Not keeping up with changing sales tax rates and laws – State and local sales tax rates change all the time. Fortunately, Amazon keeps up with this for you, but you may need to keep on top of sales tax rate changes if you sell on other platforms (like eBay).
If you have to file multiple sales tax returns, you might find your tax-related headaches multiplied exponentially. Here are a few ways filing in multiple states can complicate the process:
- Sales tax compliance is governed at the state level. Forty-five states plus D.C. have a sales tax, and each one has different rules and regulations than the others. Sometimes the sales tax charged is based on the destination address, and in other states the origin address is used to calculate sales tax charges. Some states even require you to charge sales tax on shipping—it’s all over the place. Here’s a guide on how this works.
- Some items aren’t taxable. Most items sold in the United States are subject to sales tax, but in many states groceries have reduced tax rates or none at all, and other states don’t tax clothing or textbooks or some medical items.
- Tax due dates and rates vary by state. Some states make it easy by having a single flat sales tax rate but others can vary their rates from one municipality to the next. Also keep in mind that each state may have a different sales tax due date which means you might have to file at odd intervals depending on the requirements of each of your nexus states. Some states want annual or quarterly filings, but if you have a high sales volume you may be required to file monthly. It’s completely up to each state.
Fortunately it’s not too hard to make sure you’re compliant for all the states where you have to submit returns. Here are five ways to evaluate the sales tax compliance of your business:
- Double-check your sales tax nexus— If your business haSales Taxs grown this year you may find that you have established nexus (a significant presence) in an additional state. Have you:
- Hired an employee, salesperson, or contractor who physically works in another state?
- Opened a new physical location or stored goods in a warehouse in a new state?
- Used third-party affiliates to send sales to your store?
- Travelled to another state to sell products at a trade show or craft fair?
- Created a drop-shipping relationship with another company?
If any of those sound familiar, you may have created sales tax nexus in a new state. To make sure, check out each state’s criteria for creating nexus.
2. Review your sales tax permits— If you’ve just realized you have nexus in a new state you need to make sure you register for a sales tax permit in that state right away. Like I mentioned above, you shouldn’t begin collecting until you’ve received your permit.
Another thing to keep in mind is that you may no longer have nexus in a particular state. Perhaps you don’t have that remote employee anymore or won’t sell at that particular craft fair in the future. If this happens, contact your state’s taxing authority to cancel a sales tax permits you no longer need.
Keep in mind that some states will consider you to have nexus for a few months or longer after you no longer have nexus—this is called “trailing nexus” so you should check with the state you’re cutting ties with to make sure you don’t have trailing nexus before filing your last return with that state.
3. Review or change your filing frequency— Many states may require your business to file monthly returns when you first register for a sales tax permit, but afterward may change your filing frequency to quarterly or annually. You should check all communications from your state’s taxing authority to determine if your filing frequency has been changed.
Also keep in mind that some states will allow you to change your filing frequency when asked. One call or email could save you a lot of work if your state offers the option. It definitely pays to contact your state taxing authority to check.
4. Check for changes to sales tax rates— Like we’ve already said a time or two in this guide, state and local sales taxes are always subject to change at any time and this means that you should keep an eye on the rates and when you find changes act quickly to update the withholding rates in your store. Most rate changes happen at the first of the year, July, or October.
Keep in mind that you can always double-check a sales tax rate by entering the ZIP code into TaxJar’s Sales Tax Calculator.
5. Make sure you’re collecting on all sales channels— The biggest mistake we see at TaxJar is sellers forgetting to collect sales tax on all channels in all their nexus states. If you have nexus in a state because you stock merchandise in an Amazon warehouse but your business also sells through eBay, Ecwid, Shopify, or other sales channels, you need to make sure that you’re collecting sales tax on all of these platforms.
And the opposite also applies—when you no longer have nexus in a state, make sure you stop collecting from buyers in that state on all channels.
Hey, if you’ve made it this far, give yourself a high five for passing your checkup with flying colors!!
We can tell you from experience that sales tax is complex. Brand new sellers spend a lot of time considering the implications of becoming fully tax compliant and even experienced store owners need a helping hand from time to time. This is one of the reasons we made TaxJar, to automate the pain away. For more about sales tax, check out our Sales Tax 101 for Online Sellers Guide or join over 7,000 of your fellow online sellers in our Sales Tax for eCommerce Sellers Facebook group.
About the Author
Mark Faggiano is the founder and CEO of TaxJar, a service that makes sales tax collection, reporting and filing simple for more than 8,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!