Sales tax is complicated in the U.S., especially if you run an online store. Where do you apply a tax? When does the tax even apply!?
Well, we’ve decided to make it a little easier for you by detailing some common missteps, which should make it a bit easier to navigate sales tax compliance.
You want to keep on top of all this tax stuff because you need to ensure you stay compliant. The IRS has significant penalties for those who do not pay their tax. Even in situations where an honest mistake has been made, the payments will still be required. Avoid having to pay missed tax out of your pocket by keeping on top of the various rules and regulations.
Sure, sales tax is less than exciting, but it is a vital part of eCommerce business ownership, and life is easier if you get it right! Follow the tips below to avoid making any detrimental mistakes.
Tip #1: Know that you need to collect sales tax
It seems somewhat obvious, but you’ll be surprised how many people do not realize they need to collect sales tax! Ensuring you have updated sales tax practices is important, and yes, eCommerce stores absolutely have to pay sales tax! You are not exempt, regardless of the kinds of products you sell.
Even products that are not tangible, like cloud-based software, require sales tax. The increase in non-tangible digital sales has meant that many states now tax SaaS (software as a service) products. In addition, some states will differentiate between certain digital goods like eBooks and software, so the way you categorize your items based on the rules of your registered state will be necessary.
Tip #2: Organize data and use a reporting dashboard
If you’re a multi-channel seller and you have data living in different silos, tracking can be tricky. This can be even harder if you sell through marketplace facilitators like Etsy or Amazon on top of your own website! Most states make it a bit easier by requiring the facilitator to collect and remit sales tax on your behalf, leaving you to only be responsible for the sales tax on your website. However, not all states do this.
Furthermore, as different states have different rules, a sales tax reporting dashboard is the best way to have a single picture of all of your sales from each channel. This makes your data organization process much easier, saving time and allowing you to take a more strategic approach to any compliance needs. This is one of the many eCommerce recommendations that can help you work smarter, not harder.
Tip #3: Understand and track nexus
Nexus is a threshold that differs in each state. This is the cut-off for which a business is required to collect and remit sales tax on gross sales and the number of transactions. To ensure you remain compliant, it is important to understand these thresholds, tracking data per state to know where you’ll need to collect and remit sales tax.
For example, crossing a nexus threshold unknowingly means you may not be collecting sales tax from your customers. If this happens, your business will need to pay those taxes out of pocket. This is obviously something you’ll want to avoid, so you must understand where these thresholds sit.
Tip #4: Remember your filing deadlines
Filing deadlines can be pesky little things as they are different for every state. To further add to the confusion, the deadlines may change as your business grows. For example, the more revenue you earn, the more frequently your taxes need to be filed (depending on the state).
You will find monthly, quarterly, and yearly filing due dates, and in most cases, these will fall on the 20th day of the month (if this is after the taxable period ends). In some cases, you will be required to file by the last day of the month, and in a select few states, you will need to file by the 15th or 23rd.
Again, these dates will depend on the size of your company at the time. So, be sure to pay attention to the filing dates based on states in which you have a nexus, and set calendar reminders to ensure they are not missed. Keeping up with tax dates is just as important as keeping up with other market moves, which platforms like Stockdork can help make a lot simpler!
Tip #5: Classify products and their tax rates correctly
Rates are important. Be it the rate you are being charged on your business credit card or what you are charging on your goods, rates matter.
Tax codes in the U.S. are filled with all kinds of nuances based on specific product types, and, to make things more confusing, every state has different parameters. To keep your taxes in good order, you need to understand exactly how different states classify your products.
These classifications can be made much easier by automating them with sales tax software. However, some classifications are open to interpretation, and require expertise that even the best software can’t provide. In these cases, we recommend consulting a sales tax professional.
Save yourself some trouble by automating your compliance
As we can see, eCommerce sales tax is confusing and overwhelming! Fortunately, plenty of sales tax software is available to automate the process, saving you time and hassle.
To find the software that is best suited to your needs, consider the sales tax compliance tasks you specifically have to deal with. These may be real-time calculations, aggregated reporting, or filing considerations per state. The solution should track your nexus status and notify you when you’re approaching the threshold in each state.
If you take one thing away from these tips, it’s that automating your sales tax is the best way to save a lot of headaches. And one thing that eCommerce business owners can agree on? The fewer headaches, the better!