Sales Tax pitfalls you can avoid to escape penalties
To err is human…
To forgive is against government policy.
You may ask, how complicated can selling to US and dealing with Sales and Use tax, possibly get?
The answer is, unfortunately: VERY.
Making mistakes in sales tax compliance is common, considering the fluidity and complexity of business taxes. So, we need to learn the don’ts and make sure penalty doesn't catch up with us, as sellers.
Here's A quick list of mistakes to learn and avoid:
1. The great ignorance of tax laws and changes
“Ignorantia juris non excusat” (Latin for "ignorance of the law is not excused"). There are circa 13,000+ sales tax jurisdictions in the US which evolve, change and amend dynamically. A seller must stay abreast of all the rules, rates and boundaries concerning his/her business. If you miscalculate your tax rate or rules then a heavy penalty awaits at the other end of the tunnel for you. Tip: An automated sales tax compliance tool comes in handy to keep your compliances leakage-proof.
2. Collecting but not remitting tax
Important on the list of cardinal sins of sales tax is the collection but no remittance is followed. Collecting and remittance of tax are two different and mutually exclusive steps to complete tax compliance. So, if as a seller you collect but do not pay those collected taxes to appropriate tax authorities you may end up with massive fines. Always remember, converge and diverge sales tax.
3. (Mis)Reading the sales tax nexus
Economic nexus of your sale- To be or not to be? Determining the accurate sales tax nexus for your sales is like finding a needle in a haystack. Sellers may fall into the pitfall of missing the economic nexus. Businesses may fail to stay conformable with nexus laws, as there is no consistency on the level of revenue or the number of transactions used to determine economic nexus. If you fail to correctly deduce your nexus you may end up paying hefty fines. A guide to refer, here.
Why the ‘economic nexus’ is a moving goalpost?
In, 2018, the Supreme Court held through the case of South Dakota v. Wayfair, that states may impose sales tax on remote sellers based on the volume and/or dollar value of sales in a jurisdiction, regardless of physical presence. This is a landmark judgement that makes the determination of nexus more complicated and ever evolving.
4. Mismanaged exemption and resale certificates
Exemption certificates aid a purchaser to make tax-free purchases and a re-seller can claim exemption of taxes when a sale is in the nature of a re-sale. This exemption is awarded because they are not the end user, i.e., the person who “consumes” the product. Adequate certificates are important for both such exemptions and absence or lack of validity can have serious monetary consequences for a seller in an audit. So, automated software to create certificate management is advisable to escape unwelcomed penalties.
Many states also recognize the Uniform Sales & Use Tax Certificate. So, if you do business in multiple states, this may be a time-saving way for you to present your vendors with your tax-exempt documentation.
5. Unstructured data and computation
It’s high time we discuss the elephant in the room, “The Errors of the Humans”. The saying goes to err is human, but when it comes to taxes, the saying doesn't hold water. So, it is better to address this and not see your bank account being drained because of penalties. It’s advisable to leverage the power of automation to structure your tax data and compute it accurately. Manually trying to compress and compute tax can lead to unavoidable human errors. Tax is numbers buried in heaps of documents- so it is quite possible to end up making computational errors and land in a mine of fines. Using automation software for the calculation of taxes is undeniably a quick win. Let the machine take care of the mundane tasks, while you focus on business strategy.
Sales Tax is a diabolical creature to pacify and errors invite a feeding frenzy of fines and penalties. As an informed seller, it’s important to review and structure your compliance to avoid a tax controversy.
Here’s to adequate compliance and more success.