Small Business Week: 5 Sales Tax Facts

From everyone at Avalara, Happy Small Business Week!

Small businesses play an important role in our economy; approximately 29.6 million small businesses employ roughly 57.9 million people in the United States alone, and there are more than 125 million small businesses throughout the world. No wonder we’re excited to celebrate this week with small businesses around the globe.

While we know most small businesses would rather focus on growth than sales tax compliance, it’s still critical to get compliance right. So, this Small Business Week, we’ve compiled some quick and helpful sales tax compliance tips for you. (View the full list of resources here.) Below are five sales tax facts pulled from these resources, to help separate fact from fiction.  

Fact 1: Alaska doesn’t have a general sales tax; however, local jurisdictions in Alaska are allowed to establish their own sales tax rates, rules, and regulations.

Five states don’t have a general sales tax, and Alaska is one of them. Together, they’re often referred to as the NOMAD states: New Hampshire, Oregon, Montana, Alaska, and Delaware.

While Alaska doesn’t have a general sales tax, many Alaska localities levy a local sales tax. This makes it a home rule state. Home rule states allow local jurisdictions to establish their own sales tax rates, rules, and regulations. So companies doing business in Alaska should check to see if they should be collecting sales tax in the communities where they sell.

Fact 2: States aren’t obligated to inform businesses that they have nexus.

A recent Wakefield Research report found that 41 percent of respondents believe it’s the state’s responsibility to contact a company if nexus is presumed in the state. That’s not the case.

Every business must constantly monitor its activities to determine if, when, and where nexus is established. It’s the responsibility of the business to register in new jurisdictions when required. This is perhaps easier said than done, as nexus is triggered differently across all jurisdictions.

Fact 3: The average cost of an audit is more than $300,000. 

According to Wakefield Research, the average cost of an audit can reach $300,000. A common trigger for audit penalties is the inability to produce the correct documentation to validate exempt sales.

One misconception is that if a business is audited and errors are discovered, the company would just owe the back taxes they failed to pay. Not true. Penalties and interest are typically added, and they continue to accrue until the balance is paid.   

Fact 4: You can get an early payment discount in 28 states for filing your sales tax returns on time.

While all states penalize businesses for late and incorrect sales tax returns, close to 30 incentivize timely filing by offering a sales tax filing discount to businesses that file returns and remit payments by the due date. Two states even offer additional savings when tax is paid early. The incentives vary widely by state, and some are small, but over time they can add up to substantial savings.

Fact 5: Almost 10 states have adopted use tax notice and/or reporting requirements for non-collecting sellers.

Because of the rise of ecommerce sales, more and more states are looking for ways to collect sales tax revenue from out-of-state businesses that are not registered to collect in their state. Colorado passed a law in 2010 that made it so non-collecting sellers have to:

• Notify Colorado customers that sales tax wasn’t charged and the consumer could owe use tax to the state
• Give Colorado customers annual reports of their purchase activity
• Give the state annual reports of customer consumer use activity

The goal is to encourage non-collecting vendors to collect tax on their sales and increase use tax collections. Because Colorado successfully passed this law, a number of states have followed suit with similar laws of their own.

Compliance is tricky, but we can help

We know sales tax compliance can be tricky, especially for growing companies looking to expand into new markets. Like Colorado with its new notice and reporting requirements, state and local governments are finding creative ways to increase sales and use tax revenue — and out-of-state companies are a prime target.  

The tips above just scratch the surface when it comes to staying compliant. To learn more, check out the resources we’ve compiled for Small Business Week. And from all of us at Avalara, have a great Small Business Week!