20 Reasons Ecommerce Sellers Should Care About Sales Tax Compliance
- May 22, 2015 | Ryan O'Donnell
For many small business owners, the question of when and if to collect sales tax on ecommerce sales hangs like a specter over day-to-day operations. We've talked to many businesses that are so consumed with daily operations that, while legally required to be sales tax compliant, they continue to place it on the back burner. On my way to a conference last month, an Uber driver mentioned his side business selling goods on Amazon. Of course, I inquired about how he's managing sales tax.
"The Washington DOR has called me a few times asking questions about sales tax. I just ignore them."
Yikes. If that isn't a recipe for an uncomfortable meeting with a state sales tax auditor, we're not sure what is. Have no fear, we're here to help you get over the proverbial sales tax hump.
In this post we're calling out twenty reasons to get stop putting off sales tax collection. Whether you have your own Shopify store site, own your own brick and mortar store, or are a drop shipping FBA seller, sales tax is a real responsibility with serious consequences if ignored for too long.
1. You'll learn where and when to collect sales tax.
If you don't understand the fundamentals of sales tax, such as nexus, remittance, and filing frequency, you won't know when or where you are required to collect it.
2. It may influence how you structure your business.
Considering joining Fulfillment by Amazon? Make sure you understand how it could trigger sales tax nexus for your business. Without a firm understanding of sales tax rules, you may find yourself making business decisions that are great for marketing or sales, but are bad for business down the road. Even an innocuous event such as attending a conference outside your home state may seriously impact your sales tax exposure.
3. You'll gain a better understanding of taxing jurisdictions.
In most states, it isn't just the state that is collecting sales tax. Local jurisdictions (cities, counties, parishes, etc.) often can and will impose a sales tax beyond the general rate the state requires businesses to collect. While this collection may happen even if you don't know how, it's always good to understand the breakdown of the sales tax you've collected. When it comes time to file your sales tax return, you'll find yourself faced with all the jurisdictions that are expecting their money.
4. You won't be influenced by misinformation.
Wild ideas about sales tax compliance abound. A few minutes on the Amazon Seller Central forums will leave you with more questions than answers. Informed business owners, however, spend less time searching for answers to sales tax questions and more time attending to growing their business. Taking the time to understand your sales tax responsibilities will not only save you time in the long run, it will help prevent making the wrong business decisions or setting up your online store to collect sales tax incorrectly.
5. Better your chances of avoiding penalties.
Most states charge a flat penalty fee for sales tax collected, but not remitted on time. That's just money out the door! Know your filing frequency and deadlines so you don't get stuck paying additional money.
"If you file a return late by 60 days or less (the penalty is equal to) 10% of the tax due for the first month plus 1% for each additional month or part of a month not to exceed 30% of the tax due. However, this penalty cannot be less than $50." - New York DOR
6. Avoid interest on back taxes.
As if penalties aren't bad enough, failing to remit sales tax by the assigned deadline can lead to interest payments on the outstanding balance. Moreover, the interest is compounded. That means it is added to the principal. Over time, that can lead to some hefty charges.
"If any amount of tax is not paid by such date, there shall be added to the tax interest at the rate of the Federal short-term rate per I.R.C. Section 6621(b), plus four percentage points, compounded daily." - Massachusetts DOR
7. You'll better understand how to file sales tax returns.
Filing sales tax returns may sound simple, but it's more than just sending a check to the state. First, every state has their own unique filing frequencies and due dates. You'll want to make sure you understand both for the states in which you are required to file. Second, the process for filing changes depending on how you file your sales tax returns (by mail, efile, online). Finally, did you know you are required to file an on-time return in every state you are registered to collect sales tax in regardless of whether you collected any sales tax? It's known as a zero-tax filing. In some states, failure to submit this return may result in penalty charges.
8. Be prepared for (and decrease chances of) audits.
Nobody wants to go through an audit. They're stressful, time consuming, and expensive. What's one way to decreases your chances of being audited? Understand your sales tax filing responsibilities and stay on top of things. The more in compliance you are with state and local tax rules, they less likely you are to be selected for an audit—although you're never 100% in the clear.
9. Improve your record keeping.
Speaking of audits, let's talk about your sales records. In the event of an audit, there are all kinds of records that may be reviewed. If you don't understand which tax records to keep, you may find yourself without the forms the auditor is prepared to ask for. Not a good situation to be in if you want your audit to go smoothly.
10. Minimize the distraction.
Building and running a business is hard work. Late nights and weekend work is common. Do you really have time to deal with sales tax every month? Yes, filing is an ongoing task and it will demand your attention periodically. However, if you establish a solid foundation of understanding, the filing tasks can be automated to save you time.
11. It's good for the economy.
Maybe you've never thought about it, but sales tax makes up a large portion of state revenues. For example, in Florida, general sales and gross receipts taxes accounted for $5.4 million or 58% of all state tax collections in Q4, 2014. In Hawaii, sales and gross receipts taxes accounted for $737,000 or 46% during the same period. With percentages like that, it's clear sales tax is a crucial contributor to state revenues. As a business owner, you have a responsibility to understand where you have nexus and, consequently, where you need to collect and remit sale tax.
12. Because the DOR doesn't have your back.
Should your number get drawn for an audit, it's going to be you and, if you're lucky, your accountant who are responsible for digging you out. Establishing and retaining sales tax compliance is your responsibility. You're unlikely to find a Department of Revenue that is going to be sympathetic to a plea of ignorance. Take the time to get up to speed on sales tax rules and regulations before you're forced to learn it all in a very short period of time.
13. There is no substitute for knowledge.
It can be difficult for small business owners to know when to begin collecting sales tax. At what point do your sales and the sales tax you are required to collect become material? As we've talked about before, the answer to that question is determined by your own risk tolerance. The key to understanding when things have gotten too risky is knowledge and experience. The sooner you care about sales tax and start paying attention to it, the sooner you'll establish a framework for how to evaluate your own level of risk.
14. Sales tax rules change all the time.
You may have noticed sales tax has been in the news quite a bit recently. Amazon's sales tax footprint, the Marketplace Fairness Act, Streamlined Sales Tax, and ever changing tax rates are just a few of the variables you should have a basic understanding of if you're selling taxable goods. Even better if you take the time to stay up to date on the latest news that may impact small business owner.
15. Help avoid over / under taxation.
Different products and services have different taxation rules. If you don't know the rules that pertain to what you are selling, how can you know if you are charging the correct amount? Over collect and you're charging your customer too much. Not a good long term plan in a
competitive market. Charge too little and you may be on the hook for the outstanding balance.
16. Impact on the systems you use.
How you are going to manage sales tax collection may have an impact on the For example if you're a mobile seller, you'll want to make sure you have a POS system in place that can pinpoint your location. Selling from a kiosk? Again, you'll want to think about the POS you're using.
17. Shipping and handling may be taxable.
Did you know shipping and handling is taxable in some states? Well, now you do. The last thing any small business wants to find out is that they're on the hook for sales tax on shipping they failed to collect. It's just one more reason to be knowledgable about sales tax.
18. Because eventually you'll make tax exempt sales.
If you're selling taxable goods, it's only a matter of time before a buyer requests to be exempt from sales tax. Whether they're a reseller, a non-profit (although non-profits aren't always tax exempt), or a resident of a NOMAD state, you'll need to understand how to handle the situation, what to document, and how to handle the transaction come filing time.
19. Have a better feel for when you need help.
If you don't understand sales tax, it's very difficult to know when you've grown beyond your means. There are CPAs and tools like Avalara TrustFile waiting to help you maintain sales tax compliance, but you have to understand when you need help. That can only happen if you understand sales tax.
20. It's the law.
That's right, if you collect sales tax, by law, you have to remit it to the appropriate state or local taxing authorities. Are the authorities going to come kick down your door if you mess up? That depends on the situation, but no small business owner wants to go through the pain of an audit so think carefully about how you manage your sales tax exposure.