Sales tax is not a cut and dry subject; on the contrary, it has a lot of moving parts. When it comes to sales tax for online sellers, however, things can get even more complicated.
Different states require a different tax on different items, and policies are always changing and adapting. Furthermore, within a state, there may be regions where sales tax rules vary from one state to another. Not taking the time to understand this can have serious repercussions, and potentially unnecessary cash out of your pocket.
Know Your State’s Laws
One of the tricky things about sales tax is the fact that individual states are permitted to set their own—there is no such thing as a national sales tax. This means that states are allowed to select which items to tax and how much tax to charge.
Furthermore, many states allow local areas to set their sales tax independent of the state. While it’s impossible to list each of the sales tax jurisdictions differing sales tax regulations, the main takeaway is that it’s important to research your state and region’s sales tax rules as there may be a considerable variation that you aren’t already familiar with.
Know Your Company’s Obligations
Online Sellers and local retailers in the USA are only required to collect sales tax when they have ‘Nexus’ in that state. A Nexus means a significant presence and refers to factors such as a physical location, personnel, affiliates, or other business activities.
You also need to know what items are taxable and which ones aren’t. While most states tax items such as clothing, textbooks, and groceries, others do not. This means that online Sellers and local retailers in different states or in different state localities can have different combinations of sales tax requirements.
Understand Filing Frequency
After you determine whether or not you have Nexus in a state you will need to register for a sales tax permit. When you do this, your state will inform you of your filing frequency. This means the frequency for filing your tax returns.
Typically the filing frequency will be monthly, quarterly, semi-annually, or annually. The frequency will be determined by the size of your Nexus and state’s rules. The more tax revenue you generate in a state, the more frequently it will be collected, as a general rule. The money is used for local infrastructure, so states would prefer that it be active instead of sitting in an account.
Avoid Fines and Penalties
Due to the variation in state sales tax, it can be easy to make an honest mistake. The two most common mistakes businesses make are not collecting sales tax when they should be, and not paying these taxes ontime. Once you realize how complex the process is, it’s not surprising why these mistakes are made.
Sales tax is due in some states on the 20th of the month. In other states, it’s due on the 15th, or the 23rd. Depending on your state it’s easy to get the dates mixed up. It’s also easy to confuse the amount of sales tax to pay as an online seller.
Mistakes like these can result in penalties and extra interest. However, if something falls through the cracks it’s always worth discussing this with your state’s tax authority as some are willing to waive innocent mistakes.
Know the Standards and Guidelines
Sales tax policy is always changing, so you need to stay up-to-date. In some cases, the sales tax rate changes, at other times, it’s the filing frequency. Sometimes a state will start taxing an item it didn’t tax before or reduce the number of items taxed.
When it comes to online sales tax, the policy is even more varied. Current guidelines say that sales tax should be paid at the point of sale, which means the buyer/end user. At present, this is the case, but it is subject to change at any point.
Hire a CPA
Outsourcing these complex tasks to a Certified Public Accountant (CPAs), especially when utilizing technology to streamline the calculation of your sales tax and whether Nexus is applicable or not, will save you time and money so you can focus on growing your business.
A CPA has the professional experience needed to organize your sales tax and ensure you pay the right amount at the right times. With so many moving parts when it comes to selling online, it is worth investing a little in a CPA to ensure you’re compliant and avoid penalties. Having professional help will ensure you are collecting from your customer and remitting the correct sales tax to the State, and avoid this money coming out of your own pocket.
Sales tax got you scratching your head? Avoid paying sales taxes out of your own pocket. Contact Insogna CPA today for ongoing accounting advisory.