The five most common eCommerce U.S. Sales Tax Pitfalls
At one time it was a time when sales tax was effortless for retailers of eCommerce in the United States. In the early days before regulators stepped in to regulate the business, they could not charge sales tax for transactions within states in which they had no physical presence.
In the year 2018, things became more complicated when it was decided that in South Dakota vs Wayfair, the U.S. Supreme Court declared that each state could set many of its own rules around the tax on sales for online stores. In the present, 45 states have state-wide sales tax and each has their own nuanced rules. Beyond those, there are currently more than 11,0000 local or county tax jurisdictions. It isn't easy keeping track of everything.
Five sales tax pitfalls to avoid
Given the complex nature of sales tax compliance across America, sales tax is a complicated issue. U.S., avoiding the common missteps below can help you navigate the majority of tax compliance. You should be prepared for this tedious aspect of eCommerce company ownership.
The #1 Pitfall: Not knowing the need to collect sales tax
Although it's been three year from it was three years since the Wayfair rule, some companies aren't yet up-to-date with their tax-related practices. If this is you and you're not paying or filing taxes the required taxes, it's time to speak with an SALT (State and Local Tax) Consultant (SALT) to learn about your tax liability from previous taxes and develop a strategy for moving forward.
The good news is the state revenue departments tend to be more accommodating when you go to them rather than figuring out the mistake themselves.
The following scenario is more common: companies know that eCommerce stores have to pay sales tax, but mistakenly believe that the stores are exempt due to the type of merchandise they sell. This is a common mistake made by SaaS companies and digital merchants.
Regulations tend to move in a more gradual manner than technology, and for many years taxation of sales was based almost exclusively on tangible items like furniture, televisions and TVs. However, in recent years, there has been a rise in products which don't have tangible characteristics in any way such as applications downloaded through the cloud. There's no physical CD-ROM to be taxed for this software which is why it was previously thought it wasn't subject to sales tax. As states have observed an increase in sales of these non-tangible digital goods and are changing their regulations to bolster their revenue.
In the present, 20 states tax SaaS (software as a service) items. It's worth looking at a detail of how each one of them tax SaaS. Do your products fall under the category? Many states differentiate between digital products like eBooks and software, so it is important to label your goods in a way that is appropriate.
Pitfall #2: Forgetting to monitor the nexus
Nexus is one of the trickiest concepts when it comes to sales tax compliance. It is essentially, nexus is the level at which the state has a requirement for a business to collect and remit the sales tax. This used to be largely physical (a business presence within a state, for instance) However, since the days of Wayfair, states have placed in place economic thresholds, in terms of gross sales as well as the number of transactions.
To stay compliant for compliance, it's important to be aware of these thresholds and track details for each state, so you are aware of where you fall and do not need to collect and remit sales tax. If you exceed a nexus threshold without knowing the threshold and you don't start collecting sales tax from customers, your business will be required to pay the taxes on its own. This isn't a pleasant situation --- ask these six retail stores.
Pitfall #3: Scattered data and reporting
States have their own rules in regards to how much your sales on these marketplace facilitators are counted towards your threshold for nexus. As you can see, it can get difficult fast. A sales tax dashboard will give you a single, holistic picture of your total sales across all channels along with the tax that has been collected and what you need to pay yourself. It will help you save a lot of time and better enable you to take a strategic approach to your complying.
The fourth pitfall is misclassifying goods (and the tax rates they impose)
Did you know that in New York, a bagel is tax-free when it's a supermarket essential - however when you cut that same bagel, it's taxed at 8.75% as a prepared food item? And in New Jersey, real fur clothing is considered a luxury item and taxed, but synthetic fur isn't. In Pennsylvania, both synthetic and real fur is tax-deductible.
Tax codes are brimming with this kind of nuance, and every state offers different terms and definitions. It's important to know precisely what your product's classification is by each state. Tax software for sales can be used to simplify these classifications, however when your business has items that are susceptible to interpretation regarding their taxability, you may need to speak with a sales tax professional.
Pitfall #5: Missing filing deadlines
The filing deadlines are not only different for every state, but for several states the filing deadlines can be altered as your company grows in size. Typically, the more revenue the business earns as well as the greater frequency that states will require that you file tax returns.
There are monthly, quarterly as well as yearly deadlines, dependent on your state's requirements and business's size. The majority of states require taxpayers to make filing on the 20th of the month that follows the month when the tax-free period has ended. Some states require sales taxpayers to file their tax returns by the end of the day of the month after the taxable period, however. There are a small handful of states that require companies to submit their tax returns by 15th or the 23rd. That's why it's important keep track of the filing deadlines of the states with which you are in a nexus.
Automate compliance and Reduce errors, save time
If this all seems to be a little overwhelming, there's good news. TaxJar is a sales tax software that TaxJar works seamlessly with and will make it easier to automate a large portion of the processes. This includes the difficult part of sales tax compliance including real-time computations as well as aggregated reports across every channel, and filing with each state. The right automated solution will also track your nexus status in every state and warn that you're nearing the threshold. It will also keep track of those pesky changing filing dates.
If you're concerned that you're not in compliance, now is the perfect time to get your act together. Set up a time to meet with a SALT consultant to discuss the particular situation you're facing and come up with an action plan. If you should have been collecting sales tax but not yet, they will assist you in taking the next steps in order to reduce fines and penalties.
If you're not already making sales tax automated, you ought to consider doing the possibility of doing so. This will free up time that you could be investing in more strategic matters as well as reduce the potential for errors. Because, in the end humans are all just human.