Sales and use tax: Why it’s so important to get invoices right
Ever go to a restaurant and order a glass of wine with dinner? OK, a lot of people do that. But say it’s a great dinner, you and your friends eat, drink, and be merry for longer than expected, and before you know it, your group has consumed a couple bottles’ worth of wine … ordered one glass at a time.
The bill comes and sure enough, you realize you could have saved a fair few dollars if you’d just ordered the bottles outright.
Sales and use tax can be just as sneaky as that wine.
For instance, how you prepare your invoice can have a significant effect on tax rates. Just ask M&Y Developers in New York.
Because the concrete they purchased for an improvement project was charged separately from the installation, it was subject to sales tax.
It’s important to understand how invoicing affects tax on the products you sell. After all, if customers think your accounting practices are costing them money, they aren’t likely to return.
So how do you reduce taxability without risking noncompliance? Here are a few considerations:
- Charging for goods and services
- Properly structuring invoices
- Applying the right tax rates
Charging for goods and services
The M&Y Developers situation is an example of combining goods and services on an invoice. While the concrete would have been nontaxable if it had been included with the installation, some states go the other way: Sales combining goods and services render an otherwise nontaxable service taxable.
An example of this is shipping. For many states, shipping is taxable if it’s included in the cost of the sale, but not taxed if it’s a separate line item.
If you deal with shipping as a part of your business, it’s vital to check your state’s rules, as they vary wildly. States may tax shipping depending on whether your goods:
- Are delivered by a retailer or a carrier
- Are available for pickup or just delivery
- Come directly from the retailer or are drop-shipped
If making some adjustments to your shipping process can save your customers some money in taxes, it may be a change worth making.
Properly structuring invoices
A simple invoice change is to include both the purchase address and the delivery address. Many businesses make purchases from a single location, regardless of where the goods are delivered or the service is performed.
If your sale is going to an area with a lower tax rate, you may be able to apply that tax rate, rather than the higher rate of the purchase address.
Another invoice change is to properly and clearly identify the products or services you’re selling. Nuance is a big part of tax code so being clear can help ensure you’re hitting the proper tax rate.
Applying the right tax rates
One of the most frustrating tax issues for a customer is being overcharged on sales tax. It happens for a variety of reasons but two common causes are:
- Improper item classification
- Inaccurate rate calculation
Proper item classification is key to properly identifying items on your invoice. If items aren’t classified correctly, invoicing gets a whole lot trickier. And time-consuming.
There are tomes of classification codes based on the characteristics of your wares. You can also automate classification with a service like Avalara Item Classification.
Once your items are classified, you can determine the appropriate tax rate. A solution like Avalara AvaTax can automate that process. Many businesses handle rate calculation manually using tax rate tables. If you do, be aware that tables have three major flaws impacting accuracy:
- They often tie rates to ZIP codes, which don’t always line up
- They don’t account for special taxability rules
- Rates change often, so tables can be outdated fairly quickly
Whether you use tables or want an automated solution depends largely on the size of your business, complexity of your catalog, and where you do business.
Ultimately, it’s your responsibility to apply tax rates using updated rate information. Part of that is knowing how states tax the services or products you sell, and how those rates can change. Simple adjustments can reduce tax burdens on your customers — though it’s important to still present your goods and services honestly to tax authorities.
We recommend speaking with a tax expert familiar with the rules in your state and where you do business.
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